A fundamental puzzle in the political economy of trade concerns how political coalitions form around trade policy. Standard models predict that only large, globally engaged firms will organize politically — leaving most domestic firms on the sidelines. But this misses a crucial feature of modern economies: the dense web of supplier–customer relationships that tie firms together in domestic production networks.
In a new working paper, we develop a theoretical model showing how production network ties fundamentally alter the political incentives of domestic firms. A firm embedded as a supplier to an export-oriented hub has strong indirect incentives to support trade liberalisation — even if it never directly exports a single unit.
The Production Network Mechanism
The core insight is straightforward: when a firm sells intermediate goods to a downstream exporter, its fortunes are tied to that exporter's competitiveness in international markets. A tariff hike that harms the exporter ripples upstream, reducing demand for the supplier's output. The supplier is exposed to international markets not through its own trade but through its network position.
Ignoring production network ties risks systematically misattributing who benefits from — and who bears the costs of — economic globalisation.
This mechanism has significant implications for our understanding of political coalitions. Rather than a fragmented landscape of individual firm interests, production networks can aggregate preferences across many firms — creating the basis for broad coalitions that cut across sectors.
Empirical Evidence
We test these predictions using a new cross-country dataset linking firm-level trade data to domestic input–output relationships. The dataset covers 18 countries over a 20-year period, and captures both the quantity and quality of production ties between firms in different sectors.
Our findings provide strong support for the network mechanism. Firms with greater upstream exposure to globally engaged customers are significantly more likely to engage in political activity favouring trade liberalisation — even after controlling for their own trade exposure, size, and sector.
Coalition Formation
Beyond individual firm behaviour, we show that denser production network ties between sectors correlate with the formation of cross-sectoral trade coalitions. Sectors that are tightly integrated through buyer–supplier relationships are more likely to coordinate their lobbying efforts — and to do so across traditional sector boundaries.
Implications
These findings have important implications for how we think about the political economy of globalisation. Standard accounts focus on the direct winners and losers from trade. Our framework reveals a much larger set of firms and workers who are indirectly affected through production network ties — and who, under the right conditions, can be mobilised into politically relevant coalitions.
The paper is currently under review. A preprint will be posted to SSRN in early 2025. We welcome feedback from scholars working on related questions.