the march of an economic idea? protectionism isn’t counter-cyclic (anymore) andrew k. rose uc...

The March of an Economic Idea?

Protectionism Isn’tCounter-Cyclic (anymore)

Andrew K. RoseUC Berkeley, CEPR and NBER

1Protection Isn't Counter-Cyclic

Summary & Objective

• Conventional Wisdom: protectionism is counter-cyclic– Tariffs, quotas, etc., rise during recessions– Perhaps valid before WWI

• New Finding: Since WWII, protectionism has not been counter-cyclic– Tariffs, NTBs have been acyclic or even pro-cyclic

• Robust to measures of cycle, protectionism, …


Why?

• Test and reject many potential reasons– Exchange Rate Regime– GATT/WTO– Importance of tariff revenue– Government size– Income, openness, production fragmentation,

intra-industry trade, …

• Measurable national “Fundamentals” don’t affect protectionism’s cyclicality


Diagnosis of Exclusion

• Rise of Modern Economics may be responsible for decline in cyclicality of protectionism– Free trade: an area of strong consensus– This is especially true in business cycle context– Don’t Protect because of Recessions!

• Optimistic Conclusion: after reducing cyclicality of protectionism, profession can reduce level of protectionism further


Quotations• “Empirical studies have repeatedly documented the

countercyclical nature of trade barriers”• Bagwell and Staiger (2003)– Also cite eight papers which “all conclude that the average level

of protection tends to rise in recessions and fall in booms.” • “That the average tariff level tends to rise in recessions is a

robust finding in the literature…”– Rodrik (1995)

• “One very robust finding of the empirical literature on trade protection is the positive impact of unemployment on the level of trade barriers. The same pattern can be observed across industries, among countries, and over time …” – Costinot (2009)


From Political Science

• “That tariff levels and economic growth rates tend to move in opposite directions is a venerable piece of conventional wisdom. As early as 1879, Gustav Schmoller, the famous economist of the German historical school, noted that, ‘The times of boom, of increasing exports, of new openings of overseas markets, are the natural free trade epochs, while the reverse is true in times of foreign slumps, of depressions, of crisis.’”– McKeown (1984)


More Quotations, 1

• “One feature of tariff policy is that tariff levels tend to move in a cycle coupled with the business cycle. Tariff barriers are lowered during periods of relative prosperity, only to be raised again during world recessions.”– Cassing, McKeown and Ochs (1986, p. 843


More Quotations, 2

• “The idea that there exists some relationship between patterns of tariff legislation and a nation’s economic health is by no means new… Empirically, the hypothesis has been strengthened by the identification of an inverse correlation between levels of economic activity and protection. Historically, prosperous periods have been accompanied by free trade, and periods of depression by closure.” – Gallarotti (1985, p. 157)


More Quotations, 3

• “It is generally agreed that in a modern industrial economy the cyclical state of the economy and the country’s competitive position internationally are the principal determinants of the degree of protectionist pressure. Low levels of economic activity, high unemployment, unused capacity, … all operate to increase the temptation to protect domestic industries from import competition.”– Takacs (1981, p. 1987)

• “… as Bagwell and Staiger (2003) and others have established, … there is an empirical presumption that import protection rises during recessions … ”– Bown and Crowley (2012, p. 2)


Literature has Different Focus• Normal focus of determinants and incidence of

protectionism is cross-sectional– “Why do certain industries/areas/interest groups receive

protectionism, while others do not?” • Grossman and Helpman (1994) a prominent example

– Many tests, including Goldberg and Maggi (1999)• Focus here: time-series variation

– “How does protectionism respond to business cycle fluctuations?”

• Hansen (1990, p 537) “Among quantitative studies, most model the rates of duty in the cross-section, across industries, usually in recent periods … Only a handful of quantitative studies examine policy variations over time.”


Literature: Counter-Cyclic Protectionism before WWI

• Hansen (1990) “During economic recessions, the federal government posted taxes [tariffs] 4.69 percentage points higher than it did during expansions.”

• Gallarotti (1985) finds counter-cyclic protectionism from pre-WWI data from Germany, the UK and the USA

• McKeown (1984)


Literature: Long-Term• Magee and Young (1987): tariffs rise with unemployment

– Standard techniques, data from twenty twentieth-century American presidential administrations.

• Bohara and Kaempfer (1991a) American data 1890 to 1970– VAR : a) real trade balance; b) log unemployment; c) growth real GNP;

d) inflation; and e) growth rate of average tariff on dutiable imports. – Find significant Granger causality to tariff levels from all variables

except the trade balance. – Find impulse response functions “sensible” in the very short run

(higher unemployment/lower GDP associated with higher tariffs), but reversed within a few years.

• Bohara and Kaempfer (1991b), same data, smaller VAR– Find no significant effect of unemployment on tariffs– Also, higher growth is associated with higher tariffs.


Literature: Post WWII• Takacs (1981), annual US data 1949-1979, USITC temporary protection

petitions – Escape clause not correlated with cyclic/trend economic activity.

• Grilli (1988), 18 annual observations for EC and the USA 1969-1986, 1) log import penetration, 2) petitions for anti-dumping, subsidy-countervailing and safeguard actions

– Evidence of counter-cyclic movement in non-tariff barriers. • Heavily parameterized approach, long on assumptions and short on sensitivity analysis and

data.

• Bown and Crowley (2012), bilateral quarterly data 1988-2010 on antidumping cases, other measures

• Focus: switch in behavior for foreign growth explains lack of protectionism in great recession

• Knetter and Prusa (2003), multilateral and bilateral data for Australia, Canada, EU and USA, 1980-1998, antidumping filings

– Focus: real exchange rate; find appreciation increases filings significantly.– 3-year growth in real GDP insignificant multilateral effect, significantly negative in

bilateral.• Feinberg (2005) finds similar results; more below


Time for a Look

• Start with a long span of third-party data• US Historical Statistics

– American tariff and unemployment– Annual, starting in 1890 (unemployment)– Updated through 2010 (USITC/BLS)


Figure 1

15

Tariff

Unemployment

020

4060

1900 1950 2000

19321933

2030

4050

60T

ariff

0 5 10 15 20 25Unemployment

Correlation=.35

1890-19390

2040

60T

ariff

0 5 10 15 20 25Unemployment

Correlation=.27

1890-2010

46

810

1214

Tar

iff

2 4 6 8 10Unemployment

Correlation=-.44

1950-2010

Duties, % Dutiable Imports (Sources: USHS, USITC); Unemployment, % Labor (Sources: USHS, BLS)

American Tariff and Unemployment Rates

Protection Isn't Counter-Cyclic

Insensitive Result

• Annual data on American duties (as % dutiable imports) from Census Bureau

• Annual real GDP– NBER recessions marked

• De-trend both with univariate technique (double-exponential)– More techniques soon– Adding 1946-49 increases contrast


17

Duties

GDP 020

4060

Dut

ies/

Dut

iabl

e Im

port

s

1112

1314

1516

Log

Rea

l GD

P

1860 1910 1960 2010NBER recesssions marked

Raw Data, 1854-2010

Det

rend

ed D

utie

s

Detrended GDPCorrelation = -.22

1854-1939

1860 1910 1960 2010Correlation = -.16

After (Double Exponential) Detrending

Det

rend

ed D

utie

s

Detrended GDPCorrelation = .00

1950-2010

Duties, % Dutiable Imports (Sources: USHS, USITC); Real GDP (Sources: USHS, BEA)

American Protection and Real GDP


Figure A1(Non-Parametric Approach)


0.0

5.1

0 20 40 60

Expansions, 1854-2010

0.1

.2.3

0 10 20 30

Expansions, 1946-20100

.02

.04

.06

.08

0 20 40 60P-values for Equality=.00 (t-test); =.00 (KS-test)

Contractions, 1854-2010

0.2

.4.6

.81

0 10 20 30P-values for Equality=.82 (t-test); =.80 (KS-test)

Contractions, 1946-2010

Histograms of Duties as percentage of Dutiable Imports (Source: Census Bureau)

American Duties and NBER Business Cycles

Figure A2(Trade Restrictiveness Index)

19

TRI

GNP .1.2

.3.4

.5.6

Tra

de R

est

rict

ive

ness

Index

34

56

7Log

Real G

NP

1870 1890 1910 1930 1950NBER recesssions marked

Raw Data

1932

1898

De

trende

d T

RI

Detrended GNPCorrelation = -.12

1869-1945

1870 1890 1910 1930 1950Correlation = -.05

After (Double Exponential) Detrending

1946

19471948

De

trende

d T

RI

Detrended GNPCorrelation = .31

1946-1961

Data Sources: Irwin, 2010 (TRI); Balke-Gordon/BEA (GNP).

American Trade Restrictiveness Index and Real GNP


Widely Applicable?

• Figures share problems1. Non-American data?2. Non-tariff barriers?

• Hence world-wide filings of WTO disputes– Imperfect: not all protectionism implies complaint– Not all complaints equal in importance– Non-random distribution across countries

– Note especially ‘Great Recession’ of 2009


Figure 2

21

Growth

Disputes -20

24

6G

row

th

010

2030

4050

Dis

pute

s in

itiat

ed

1980 1990 2000 2010

GATT/WTO Dispute Initiation

Growth

NYT

-20

24

6G

row

th

020

4060

80N

YT

art

icle

s

1980 1990 2000 2010

NYT 'Protectionism' articles

2009

1997

010

2030

4050

Dis

pute

s in

itiat

ed

-2 0 2 4 6Growth

2009

1995

1985

020

4060

80N

YT

'Pro

tect

ioni

sm' a

rtic

les

-2 0 2 4 6Growth

Global GDP Growth and Protectionism


Other Measures?

• Examine trade and three trade barriers• 1995 (start of WTO) through 2011• TTBD (Bown): important, GATT-legal

– Anti-Dumping (much-analyzed) for 22 countries– Safeguards for 48– Countervailing duties for 9– Trade


Correlations: One Strong, Most Weak

23

2009

2001

1995

-10

-50

510

15W

orld

Tra

de G

row

th

-2 0 2 4World GDP Growth

Trade Growth (World)

2009

19992001

100

200

300

400

AD

Ca

ses


Anti-Dumping Actions (22 countries)

2009

2002

2000

010

2030

40N

ew

Saf

egua

rds


Safeguards (48 countries)

2009

1999

20115

1015

2025

CV

Du

ties


Countervailing Duties (9 countries)

A Dog that Barked in the Night, and Three that Didn'tGlobal Trade, Barriers and GDP Growth, 1995-2011


Note “Great Recession”!• Most serious recession in generations coincides with

decline in AD and WTO trade disputes– Similar to Eaton et al (2010), Kee et al (2011)

– But trade did collapse!• Check with “Index of Trade Freedom”

– Component of Heritage Foundation’s “Index of Economic Freedom”

– “a composite measure of the absence of tariff and non-tariff barriers that affect imports and exports of goods and services”

– Estimated annually, now available for 155 countries• 0 (North Korea) to 100 (Hong Kong, Macau, Singapore and

Switzerland currently share the highest score of 90)


Bahamas

NigeriaChad

20

40

60

80

100

Tra

de

Fre

ed

om

-.1 0 .1

Average 2004-06; Corr=-.06Hodrick-Prescott

20

40

60

80

100

-1 0 1

Average 2004-06; Corr=-.08Christiano-Fitzgerald

Eq. Guinea

20

40

60

80

100

-.5 0 .5 1

Average 2004-06; Corr=-.19Linear Time Trend

20

40

60

80

100

-30 -15 0 15

Average 2004-06; Corr=-.08Growth Rates

Djibouti

20

40

60

80

100

Tra

de

Fre

ed

om

-.1 0 .1

2009; Corr=-.44

Djibouti

20

40

60

80

100

-1 0 1

2009; Corr=-.06

Djibouti

Eq. Guinea

20

40

60

80

100

-.5 0 .5 1

2009; Corr=-.23

Djibouti

Botswana

20

40

60

80

100

-30 -15 0 15

2009; Corr=-.49

Libya

-20

02

04

06

0C

ha

nge

in T

rad

e F

ree

dom

-.1 0 .1HP-detrended log real GDP

2009-2004/06; Corr=-.00

Libya

-20

02

04

06

0

-.1 0 .1CF-detrended log real GDP

2009-2004/06; Corr=.17

Libya

-20

02

04

06

0

-.5 0 .5 1Time-detrended log real GDP

2009-2004/06; Corr=.12

Libya

-20

02

04

06

0

-30 -15 0 15Growth real GDP

2009-2004/06; Corr=.03

ITF from Heritage Foundation; (log real) GDP from World Bank. SE of correlations=.08.

Annual data before and during the Great Recession, for 155 countries.Index of Trade Freedom against Business Cycle Deviations


More Statistical Rigor

• Graphs are bivariate• Dynamics ignored• Limited measures of protectionism• Limited measures of business cycle


Panel Approach

LS Estimation (countries must have filed once):

Protectionit = {αi} + {βt} + γBCit + εit

• Fixed time, country effects always– Controls to come– Time effects unimportant (Table A2)

• γ: Coefficient of Interest• Reduced Form


Data

• 1995 (WTO starts) through 2010 (PWT7.1)• EU countries aggregated• BC: de-trend real GDP in five ways:

1. Baxter-King filtering2. Christiano-Fitzgerald filtering3. Hodrick-Prescott filtering4. Growth rates5. Residuals from linear trend


Ignore Simultaneity• Larch and Lechthaler (2011) use Ghironi and Melitz (2005) model

– Show theoretically that various types of protectionism have small (often negative) effects on output (real exchange rate appreciation)

– “While tariffs and non-tariff trade barriers increase domestic production, they decrease exports through their effects on the real exchange rate. The latter effect dominates the former and, thus, GDP goes down.”

• Ostry and Rose (1992): theoretical effects of tariffs on output are ambiguous theoretically and empirically negligible.

• Irwin (2011): “Throughout history, the business cycle has had a greater impact on tariff policy than tariffs have had on the business cycle. When the economy goes into a recession, politicians often respond by raising tariffs… In sum, there are no strong theoretical or empirical grounds for believing that higher average tariffs are the principal case of business cycle downturns or explains.”


Table 1: Responsiveness of Protectionism to Business Cycles

30

BK CF HP 1D Lt

Anti-DumpingCases (TTBD), 1978-

11.7(12.9)

7.7(12.2)

20.7(11.5)

.03(.09)

-3.8(9.5)

CountervailingDuties (TTBD), 1977-

-4.6(2.8)

-14.9*(6.7)

-3.8(2.7)

.03(.05)

-5.1(4.7)

Safeguards (TTBD),1995-

.3(.3)

.6(.3)

.3(.3)

.003(.002)

.1(.1)

WTO Disputes Initiated (WTO), 1995-

-1.6(2.9)

1.2(1.3)

-.7(1.8)

.03(.02)

.1(.6)

Mean Weighted Applied Tariff (WDI), 1988-

-7.5(18.3)

-4.6(12.1)

-8.3(14.5)

-.02(.03)

-4.5(3.0)

Index of Trade Freedom (IEF), 1995-

-7.8(7.9)

-5.8(6.8)

-6.9(7.1)

.03(.04)

7.4*(3.5)


Sensitive?

• Event Study Approach– Focus on Deep Recessions

• Many other protectionist measures on LHS– Many from WDI

• Can substitute unemployment on RHS


Event Study: Serious Recessions0

2040

60

-5 0 5

Anti-Dumping Cases

05

1015

-5 0 5

Countervailing Duties

05

1015

2025

-5 0 5

Applied Weighted Tariff

2040

6080

100

-5 0 5

Trade Freedom

327 Transitions from (growth>0, GDP above HP-trend) to (growth<-2%, GDP<2% below trend)

Means with (5,95) confidence intervalProtectionism around Deep Recessions

Protection Isn't Counter-Cyclic 32

Table 2: Other Measures of Protectionism

Business Cycle De-trending:

BK CF HP 1D Lt

Binding Coverage,% products (WDI), 1995-

-1.0*(.4)

-.8**(.3)

-.7*(.3)

-.001(.002)

-.1(.1)

Mean Bound Rate,all products (WDI), 1995-

1.2(1.4)

3.8(2.4)

4.2(2.4)

.02**(.01)

2.3*(1.1)

% tariff lines at internat’l peaks (WDI), 1988-

25.3(13.6)

16.9(11.8)

18.2(11.0)

-.03(.08)

3.9(5.5)

Customs Duties % GDP (WDI), 1990-

1.8(1.5)

1.8(1.0)

1.8(1.3)

.02**(.01)

1.5(1.8)

Exports Taxes % Taxes (WDI), 1990-

2.8(4.6)

-.4(3.4)

-.5(4.6)

-.03(.04)

2.5(2.8)

RTAs initiated/completed (Moser-Rose), 1969-

.1(.1)

.2(.1)

.1(.1)

.001(.001)

.02(.08)

AD+CVD+SA (TTBD),1977-

-5.0(6.1)

-2.0(3.4)

-3.2(5.2)

-.00(.02)

-.7(2.2) 33Protection Isn't Counter-Cyclic

Table A7: Responsiveness of Protectionism to Unemployment

34

Unemployment Lagged Unemployment


.5*(.2)

.03(.2)


-.0(.2)

-.17(.15)


.03**(.01)

.02*(.01)


-.04(.03)

.01(.03)


-.03(.04)

-.01(.04)


.01(.09)

.01(.08)


Results Very Insensitive

• Fixed Effects• Split by Country Income• Split by Country Size• Split by Time• Drop Outliers• Different Estimators• Lags


Sensitivity: Appendix Table A1No Time Effects (Global BCs)

36

BK CF HP 1D Lt


-13.4(13.1)

5.3(6.1)

-1.2(10.7)

-.06(.05)

3.7(4.1)


-21.8(25.1)

-11.0(11.9)

-17.8(20.2)

-.09(.05)

-1.0(3.0)


.1(.3)

.4(.4)

-.1(.3)

.001(.001)

-.01(.09)


-1.2(1.6)

1.5(1.4)

.0(1.1)

.02(.02)

.9(.5)


-16.0(17.5)

-2.8(10.3)

-11.7(12.5)

-.02(.02)

-2.6(3.2)


8.8(7.8)

-16.5(6.6)

-12.9(6.8)

-.03(.05)

13.3(5.3)


Appendix Table A2No Rich Countries

37

BK CF HP 1D Lt


18.6(27.6)

4.1(15.6)

22.2(22.0)

.1(.1)

14.1(14.4)


-1.2(5.8)

.1(6.8)

.1(5.7)

-.03(.02)

2.0(2.0)


.3(.4)

.6(.5)

.3(.4)

.002(.002)

-.1(.1)


.3(2.1)

1.4(1.6)

-.1(1.7)

.01(.01)

.5(.8)


9.7(7.4)

6.6(6.5)

7.3(6.4)

.06(.04)

-2.6(3.4)


-2.8(9.2)

-4.5(8.3)

-5.9(8.6)

-.01(.05)

3.9(4.2)


Appendix Table A3Only Large Countries

38

BK CF HP 1D Lt


18.8(15.4)

16.6(16.0)

29.5*(13.6)

-.0(.1)

-.3(13.9)


-5.0(3.7)

-16.4(7.9)

-3.6(3.5)

.03(.07)

-5.1(5.4)


2.1(1.5)

2.1(1.3)

1.9(1.3)

.02(.02)

.4(.5)


-5.4(6.3)

.5(3.0)

-1.9(3.6)

.04(.05)

-.2(1.0)


19.2(22.6)

4.5(19.8)

7.0(18.6)

-.0(.1)

-10.6(6.7)


-2.0(16.2)

2.3(13.9)

2.2(14.9)

.1(.1)

20.3(5.4)


Appendix Table A4Sample Ends 2008

39

BK CF HP 1D Lt


17.0(18.6)

9.5(17.9)

20.2(17.4)

-.0(.1)

-2.5(5.0)


-5.3(21.6)

-13.6(20.0)

-1.7(19.8)

.0(.1)

-9.8(9.0)


.2(.4)

.3(.3)

.1(.3)

.000(.002)

.0(.1)


-.2(2.6)

1.3(2.4)

.2(2.4)

.02(.02)

-.2(.7)


-6.4(6.1)

-4.7(5.4)

-6.9(5.4)

-.01(.03)

-4.1**(1.5)


-4.9(6.5)

-5.4(6.1)

-6.7(6.1)

.02(.04)

2.8(1.9)


Appendix Table A5Drop >|2.5σ| Outliers

40

BK CF HP 1D Lt


11.6(12.4)

12.3(13.7)

23.6(11.6)

.04(.07)

-4.2(4.6)


1.9(3.4)

-.6(3.4)

1.1(3.1)

-.03(.03)

1.2(1.8)


-.0(.1)

-.1(.1)

-.1(.1)

.000(.001)

-.01(.03)


.4(1.8)

1.9(1.0)

1.3(1.1)

.01(.01)

.6(.5)


10.6*(5.2)

7.2(3.8)

4.9(3.8)

-.01(.02)

-2.2(1.2)


-7.0(6.1)

-7.9(5.5)

-8.3(5.3)

-.00(.04)

7.0*(3.5)


Appendix Table A6Different Estimators (Poisson/Tobit)

41

BK CF HP 1D Lt


1.8*(.9)

1.2(1.0)

2.5**(.9)

.01(.01)

1.1(1.0)


.1(1.5)

-1.3(1.3)

.4(1.3)

-.05**(.02)

-.4(2.3)


12.0(7.3)

10.9*(4.8)

9.8*(4.7)

.06*(.03)

1.9(1.5)


-.7(3.5)

4.3(2.9)

-.2(2.8)

.04(.03)

.0(.8)


-8.6(6.8)

2.5(1.8)

-7.7(5.7)

-.01(.03)

-3.7**(1.3)


-7.8(8.0)

-6.8*(3.1)

-7.9(7.1)

.02(.04)

6.8**(1.7)


Appendix Table A8Lagged Output

42

BK CF HP 1D Lt


21.0(13.0)

17.5(12.0)

29.0*(13.3)

.1(.1)

-4.5(9.5)


-1.2(4.6)

-16.1(8.1)

1.1(4.5)

.01(.02)

-6.2(6.5)


.1(.2)

.1(.4)

-.0(.3)

.001(.002)

.01(.09)


-3.6(2.7)

-.5(1.5)

-2.0(1.9)

.02(.01)

-.3(.8)


-6.0(9.9)

-3.8(6.3)

-7.2(8.7)

-.04(.04)

-4.3(2.9)


.4(8.0)

.8(7.6)

4.4(8.0)

.09(.05)

7.1*(3.4)


Graphically


050

100

-.2 -.1 0 .1 .2

43 countries, 1978-, Corr=.01Anti-Dumping Cases

075

150

-.2 -.1 0 .1 .2

16 countries, 1977-, Corr=-.06Countervailing Duties

05

10

-.4 -.2 0 .2 .4

157 countries, 1995-, Corr=-.01Safeguards

010

20

-.4 -.2 0 .2 .4

157 countries, 1995-, Corr=-.00WTO Disputes Initiated

010

020

0

-.6 -.4 -.2 0 .2 .4

176 countries, 1988-, Corr=-.05Applied Tariff (weighted)

050

100

-.6 -.4 -.2 0 .2 .4

177 countries, 1995-, Corr=-.04Trade Freedom

050

100

-.6 -.4 -.2 0 .2 .4

149 countries, 1995-, Corr=.04Binding Coverage, %

020

40

-.6 -.4 -.2 0 .2 .4

134 countries, 1990-, Corr=.02Duties, %GDP

05

10-.6 -.4 -.2 0 .2 .4

190 countries, 1969-, Corr=.01RTAs Started

Annual national data through 2010 (with gaps); log real GDP detrended via HP-filter

Hunting for Counter-Cyclic ProtectionismProtectionism scattered against detrended Output

Controls do Not Help

• Add Macro Controls– a) population, b) real per capita income, c) current

account/GDP, d) trade /GDP, e) PPP-deviation, and f) REER

• Mostly from WDI

• Separately add Reinhart-Rogoff exchange rate regime


Table 3aMacro Controls

45

BK CF HP 1D Lt


-7.4(29.0)

8.3(22.4)

6.0(24.1)

.1(.1)

-49.0(11.5)


30.1(39.9)

29.7(36.2)

31.2(36.9)

.0(.1)

-45.8(53.4)


-.3(.8)

.1(.7)

-.5(.6)

-.002(.003)

-.1(.2)


-.1(2.5)

3.3(2.9)

-.4(2.0)

.05(.04)

-.5(1.3)


9.3(15.3)

-1.9(13.1)

5.1(12.3)

-.1(.1)

.6(5.7)


-27.2(20.5)

-14.5(13.3)

-23.5(17.1)

-.2*(.1)

1.1(9.5)


Table 3bExchange Rate Regime Controls

46

BK CF HP 1D Lt


-3.7(25.0)

-11.9(21.4)

4.5(25.6)

-.1(.1)

-11.0(13.2)


5.2(13.9)

9.0(16.6)

7.8(16.4)

.02(.08)

-3.2(3.4)


.3(.4)

.7(.4)

.3(.4)

.001(.002)

-.0(.1)


-1.2(3.0)

1.2(1.7)

-.7(2.4)

.03(.02)

-.2(1.2)


-7.5(18.3)

-4.7(12.1)

-8.3(14.5)

-.02(.03)

-4.5(3.0)


-7.8(7.9)

-5.8(6.8)

-6.9(7.1)

.03(.04)

7.4*(3.5)


Was There a Regime Switch?

• Poor quality data before WWII• Use Mitchell International Historical Statistics

– Customs Duties, Imports, National Income– 18 countries, back to 1850 (with gaps)

• Some evidence of regime change– Data too weak to show strong signs of pre-WWII

counter-cyclic protectionism


Table 4: Pre-WWII Results: Responsiveness of Customs

Duties/Imports to Business Cycles Business Cycle De-trending:

Baxter-King Christiano-Fitzgerald

Hodrick-Prescott

First-Differencing

Linear in Time

3-year averages

-.39**(.12)

-.31**(.12)

-.33**(.12)

-.001(.001)

-.35**(.04)

Annual -.06(.07)

.01(.05)

-.01(.05)

.0007*(.0003)

-.22**(.02)

3-year avgs, interwar

-.23(.14)

-.28(.16)

-.17(.15)

.0015*(.0006)

.05(.07)


Variation across Time & Countries

• Why might there have been a regime change?• First ask: Why might protectionism be

counter-cyclic at all?


Five Rationalizations of Counter-Cyclic Protectionism

1. Counter Incentives to Manipulate Terms of Trade

2. Maintain Budget Balance3. Second-Best Strategy in Fixed Exchange Rate4. Response to Pressure from Import

Competitors5. Search Frictions in the Labor Market


1: Counter Incentives to Manipulate the Terms of Trade

• Bagwell and Staiger (2003)• Incentives to improve Terms of Trade fluctuate

with cycle– Fact: Fluctuations in trade volume are cyclic – Intuition: expected future loss from trade war highest

during boom, so reduce protection during boom

• Test by comparing large and small countries• Can control for/interact business cycle with trade

volume and GATT/WTO membership


2: Maintain Budget Balance• “For most of American history … tariffs were instruments of

revenue … Through most of the history of the republic, tariffs and taxes were virtual equivalents… Until the Civil War … the U.S. treasury derived about 90 percent of its revenues from customs duties… the tariff was the leading source of government funds until World War I, when the newly approved federal income tax eclipsed it.” To keep the budget balanced, “the governing party will raise tariffs when the treasury is in deficit and will lower duties when it is in surplus.”– Hansen (1990)

• Budgets cyclic• Relevant in world of substantive budget imbalances, NTBs?• Test with fiscal factors (government budget/revenue


3: Second-Best Strategy in Fixed Exchange Rate Regime

• “the exchange rate regime and economic policies associated with it were key determinants of trade policies of the early 1930s. Countries that remained on the gold standard, keeping their currencies fixed against gold, were more likely to restrict foreign trade.”– Eichengreen and Irwin (2009)

• Test with exchange rate regime data


4: Response to Pressure from Import Competitors

• Rent-seeking pressures grow disproportionately during recession; Cassing et al (1986)– Relies on regional differences in the composition

of immobile production factors– Surprisingly hard to model this political economy

• Test with size/dispersion data– Challenging to explain a regime switch in

cyclicality of protectionism with this theory


5: Search Frictions in the Labor Market

• Jobs have rents which depend on the level of trade protection– Costinot (2009)

• Recessions reduce rents and entry, increase incentives of incumbents to lobby for protectionism– Gallarotti (1985), McKeown (1984)

• Theories always operative– Evidence against the counter-cyclicality of

protectionism rejects them• Test via labor share of income


How to Test?

• Split the data by fundamentals– These vary by country/time

• Use 9 fundamentals– Population, Tariffs/Revenue, Exchange Regime, …– Compare cyclicality of protectionism by

top/bottom quartiles– HP-filtered GDP throughout

• Also GATT/WTO Membership



G20<1m05

1015

20W

TO

Dis

pute

s

-.4 -.2 0 .2

<1m G20

Population

<4 >2501

23

45

-.1 -.05 0 .05 .1 .15

<4% >25%

Tariffs, % Gov't Rev

FloatFix

05

1015

20

-.4 -.2 0 .2

Float Fix

Exchange Rate Regime

G20<1m

020

4060

8010

0T

rade

Fre

edom

-.1 0 .1 .2

<4>25

020

4060

8010

0

-.2 -.1 0 .1 .2

Float Fix

020

4060

8010

0

-.4 -.2 0 .2

G20 <1m

020

4060

Ta

riff

-.1 -.05 0 .05 .1

<4>25

020

4060

-.1 -.05 0 .05 .1

Float Fix

010

2030

40

-.2 -.1 0 .1 .2 .3

Log real GDP detrended via HP-filter

Protectionism scattered against detrended Output: Three Splits of the DataWhat Determines the Cyclicality of Protectionism?


HighLow05

1015

20W

TO

Dis

pute

s

-.4 -.2 0 .2

Low High

Real GDP per capita

<11 >1902

46

-.4 -.2 0 .2

<11% >19%

Gov't Cons, % GDP

ParityUnlimited

05

1015

20

-.1 -.05 0 .05 .1 .15

Unlimited Parity

Executive Constraints

HighLow

020

4060

80T

rade

Fre

edom

-.2 -.1 0 .1 .2 .3

<11 >19

020

4060

8010

0

-.4 -.2 0 .2

Parity

Unlimited

020

4060

8010

0

-.4 -.2 0 .2

HighLow

020

4060

8010

0T

arif

f

-.4 -.2 0 .2

<11>190

2040

6080

-.1 -.05 0 .05 .1

Parity

Unlimited

020

4060

-.1 0 .1 .2


Protectionism scattered against detrended Output: More Splits of the DataWhat Determines the Cyclicality of Protectionism?


>60%<25%05

1015

20W

TO

Dis

pute

s

-.4 -.2 0 .2

<25% >60%

Imports/GDP

<.72 >.8502

46

-.1 -.05 0 .05 .1

<.72 >.85

Value Added/Exports

=0 >.1505

1015

20

-.4 -.2 0 .2

GL3=0 GL3>.15

Grubel-Lloyd Index

>60%<25%

020

4060

8010

0T

rade

Fre

edom

-.4 -.2 0 .2

<.72

>.85

020

4060

8010

0

-.1 -.05 0 .05 .1

>.15

=0

020

4060

8010

0

-.4 -.2 0 .2

>60%<25%

020

4060

80T

arif

f

-.1 0 .1 .2

<.72>.850

2040

60

-.1 -.05 0 .05 .1

=0>.150

2040

6080

-.2 -.1 0 .1 .2 .3


Protectionism scattered against detrended Output: Even More Splits of the DataWhat Determines the Cyclicality of Protectionism?


<6>3005

1015

20W

TO

Dis

pute

s

-.4 -.2 0 .2

<6% >30%

Agriculture, % GDP

<40 >60

05

1015

20

-.4 -.2 0 .2

<40% >60%

Services, % GDP

<4>10

05

1015

20

-.2 -.1 0 .1 .2 .3

<4 >10

Tariff Rate

<6

>30

020

4060

8010

0T

rade

Fre

edom

-.4 -.2 0 .2

<40

>6020

4060

8010

0

-.4 -.2 0 .2

<4>10

020

4060

8010

0

-.2 -.1 0 .1 .2 .3

<6>30

020

4060

80T

arif

f

-.1 0 .1 .2

<40>60

010

2030

-.1 -.05 0 .05 .1 .15

<4

>10

020

4060

80

-.2 -.1 0 .1 .2 .3


Protectionism scattered against detrended Output: Final Splits of the DataWhat Determines the Cyclicality of Protectionism?

Figure 9


Non-Member

Member

020

4060

8010

0A

nti-D

um

pin

g

-.2 -.1 0 .1 .2

Non-Member Member

MemberNon-Member0

5010

015

0C

oun

terv

ailin

g D

utie

s

-.2 -.1 0 .1 .2

Non-Member Member

Member

Non-Member

020

4060

8010

0T

rad

e F

reed

om

-.4 -.2 0 .2

Non-Member

Member020

4060

80A

pplie

d w

eigh

ted

Ta

riff

-.2 -.1 0 .1 .2 .3


Protectionism, Business Cycles and GATT/WTO Membership

Statistical Analogue: Table 5Protectionit = {αi} + {βt} + γBCit + δDFunditBCit + εit

Dfund is lowest/highest quartile of Fund

Ho: γ=δ=0: WTODisputes

TradeFreedom

Applied Weighted Tariff

Population .96 .49 .12

Tariff, % Gov’t Rev .97 .33 .34

Exchange Rate Reg .97 .78 .41

Real GDP per capita .96 .56 .17

Gov’t (% GDP) .63 .08 .35

Agriculture (% GDP) .89 .98 .04*

Imports (% GDP) .93 .98 .17

Val Add (% Exports) .71 .54 .15

Grubel-Lloyd Index .96 .42 .66


-2-1

01

2

1970 1980 1990 2000

Baxter-King

-3-2

-10

12

3

1970 1980 1990 2000

Christiano-Fitzgerald

-2-1

01

2

1970 1980 1990 2000

Hodrick-Prescott

-1-.

50

.51

1970 1980 1990 2000

Growth Rates

Slope and 95% C.I. from cross-sectional regressions (up to 128 countries); series break in 2005.

Effect of log real GDP deviation on Trade FreedomChanging Responsiveness of Protection to Business Cycles


-2-1

01

2

1860 1875 1890 1905

Baxter-King

-4-2

02

4

1860 1875 1890 1905

Christiano-Fitzgerald

-2-1

01

2

1860 1875 1890 1905

Hodrick-Prescott

-2-1

01

2

1860 1875 1890 1905

Growth Rates

Slope, +/- 2se from cross-sectional regressions.

Effect of log real GDP deviation on Customs Duties/ImportsChanging Responsiveness of Protection to Business Cycles


Why?

• Similar cyclicality of protectionism for GATT/WTO members and outsiders

• No support for any rationalization of why protectionism is no longer counter-cyclic– Large/small, rich/poor, open/closed, fixed/float, …


Is Rise of Economics the Reason?

• More economists, and advocates of free-trade (e.g., The Economist)

• Deeper understanding of the dangers of protectionism could, in principle, be responsible for fact that protectionism no longer responds to the business cycle.


BIG Caveat

• No direct test of idea• Arrive indirectly and tentatively, after

eliminating testable, hypotheses– “Diagnosis of exclusion” reached by process of

elimination

• Still, plausible hypothesis


Surveys consistently show Most Economists are Free Traders

“Tariffs and Import Quotas Usually Reduce General Economic Welfare"Year Generally Agree Agree w provisions (%) Reference

1976 81% 16% Kearl et al (1979)

1981/82 79% 16% Frey et al (1984)

1981/82 27% 44% Frey et al (1984)

1981/82 70% 24% Frey et al (1984)

1981/82 44% 42% Frey et al (1984)

1981/82 47% 40% Frey et al (1984)

1990 71% 21% Alston et al (1992)

2000 73% 20% F-G-S (2003)

2000 87% (58% strongly) n/a W-H (2005)

2000 96% (75% strongly) n/a W-H (2005)

2005 88% n/a Whaples (2006)

2007 83% (37% strongly) n/a Whaples (2009)

2012 85% (29% strongly) n/a IGM (2012)Protection Isn't Counter-Cyclic 68

The Famous

• Blinder: “For more than two centuries economists have steadfastly promoted free trade among nations as the best trade policy.”

• Krugman: "If there were an Economist's Creed, it would surely contain the affirmations 'I understand the Principle of Comparative Advantage' and 'I advocate Free Trade‘.”

• Mankiw: “Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards.”


Many Manifestations

• Textbooks (Marshall, Samuelson, McConnell, Mankiw, …)

• Popular magazines (Atlantic, Economist)• Think-tanks (PIIE, Brookings, Heritage

Foundation, AEI, Adam Smith Institute, Bruegel, Fraser Institute, CD Howe Institute …)

• Blogs: VOX, Project Syndicate• Dedicated websites: Global Trade Alert


Hearing Voices

Query: 'now is not the time for protectionism' 20xx

050

010

00

150

0

2000 2004 2008 2012

Query: 'protectionism is a bad idea' 20xx

100

0015

000

200

00

2000 2004 2008 2012

Annual Google Search Total Results

Anti-Protectionist Chatter is Counter-Cyclic


Strong Consensus Exists

• Serious, honest disagreement in economics profession about whether/how to use conventional macroeconomic tools like monetary and/or fiscal policy for counter-cyclic stabilization policy– But no legitimate analogue for protectionism!


This Consensus Matters

• Provides strong guidance for policy-makers, intellectual bulwark against populism

• Hard to find a serious policy-maker that urged protectionism as response to Great Recession


Summary

• Protectionism has not been counter-cyclic since WWII

• Protectionism probably counter-cyclic earlier– Hard to be definitive (data quality, quantity)


Summary, continued• Little success in explaining why protectionism is no

longer counter-cyclic– No support for testable hypotheses

• Before WWI: 1) Tariffs fiscally important; 2) No GATT/WTO; 3) Gold standard

• Postwar, cyclicality of protectionist policies of countries similar, even if characteristics diverge:– Large/small budget deficits, tax bases– Inside /outside GATT/WTO– Fixed/floating exchange rate regimes– Small/large– Open /closed, etc …


Conclusion• Perhaps switch in the cyclicality of protectionism

(if true) a triumph of modern economics– Strong consensus among economists that

protectionism is generally bad for welfare.– Economists actively involved in combating counter-

cyclic protectionism; Global Trade Alert and Great Recession

– So …. do we deserve a collective pat on back? • Or a kick in the rear?

– If economists helped reduce cyclicality of protectionism, perhaps we should focus on simply reducing protectionism?


the march of an economic idea? protectionism isn’t counter-cyclic (anymore) andrew k. rose uc...

Documents

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