Import Competition and Policy Diffusion *

Abstract

The existing literature often assumes that the target of global interstate economic competition is the overseas market, that is, the markets in third, export-destination countries. However, in many countries, domestic industries compete fiercely for domestic market share with imports from other countries. Such import competition creates policy diffusion between a country and its import-competitor countries. Such policy diffusion can be observed in policy areas that affect production costs of domestic industries. We focus on import competition’s effect on social welfare policies in developing countries and test our theory in two broad types of policies: social insurance spending and progressive social spending. We find strong evidence for import-competition-induced policy diffusion in both policy areas. Moreover, in the case of social insurance, the effect of policy diffusion is mediated by the strength of labor, suggesting that strong labor is more capable of blocking welfare retrenchment policies.