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The March of an Economic Idea?
Protectionism Isn’tCounter-Cyclic (anymore)
Andrew K. RoseUC Berkeley, CEPR and NBER
1Protection Isn't Counter-Cyclic
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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, …
2Protection Isn't Counter-Cyclic
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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 cyclicality3Protection Isn't Counter-Cyclic
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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
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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)
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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)
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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
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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)
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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)
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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.”
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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)
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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.
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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
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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)
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Figure 1
15
Tariff
Unemployment
020
4060
1900 1950 2000
19321933
2030
4050
60Ta
riff
0 5 10 15 20 25Unemployment
Correlation=.35
1890-19390
2040
60Ta
riff
0 5 10 15 20 25Unemployment
Correlation=.27
1890-2010
46
810
1214
Tarif
f
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
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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
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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
Protection Isn't Counter-Cyclic
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Figure A1(Non-Parametric Approach)
18Protection Isn't Counter-Cyclic
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
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Figure A2(Trade Restrictiveness Index)
19
TRI
GNP .1.2
.3.4
.5.6
Trad
e R
estri
ctiv
enes
s In
dex
34
56
7Lo
g R
eal G
NP
1870 1890 1910 1930 1950NBER recesssions marked
Raw Data
1932
1898
Det
rend
ed T
RI
Detrended GNPCorrelation = -.12
1869-1945
1870 1890 1910 1930 1950Correlation = -.05
After (Double Exponential) Detrending
1946
19471948
Det
rend
ed T
RI
Detrended GNPCorrelation = .31
1946-1961
Data Sources: Irwin, 2010 (TRI); Balke-Gordon/BEA (GNP).
American Trade Restrictiveness Index and Real GNP
Protection Isn't Counter-Cyclic
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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
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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
artic
les
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
rticl
es
-2 0 2 4 6Growth
Global GDP Growth and Protectionism
Protection Isn't Counter-Cyclic
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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
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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
Cas
es
-2 0 2 4World GDP Growth
Anti-Dumping Actions (22 countries)
2009
2002
2000
010
2030
40N
ew S
afeg
uard
s
-2 0 2 4World GDP Growth
Safeguards (48 countries)
20091999
20115
1015
2025
CV
Dut
ies
-2 0 2 4World GDP Growth
Countervailing Duties (9 countries)
A Dog that Barked in the Night, and Three that Didn'tGlobal Trade, Barriers and GDP Growth, 1995-2011
Protection Isn't Counter-Cyclic
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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)
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Bahamas
NigeriaChad
2040
6080
100
Trad
e Fr
eedo
m
-.1 0 .1
Average 2004-06; Corr=-.06Hodrick-Prescott
2040
6080
100
-1 0 1
Average 2004-06; Corr=-.08Christiano-Fitzgerald
Eq. Guinea
2040
6080
100
-.5 0 .5 1
Average 2004-06; Corr=-.19Linear Time Trend
2040
6080
100
-30 -15 0 15
Average 2004-06; Corr=-.08Growth Rates
Djibouti
2040
6080
100
Trad
e Fr
eedo
m
-.1 0 .1
2009; Corr=-.44
Djibouti
2040
6080
100
-1 0 1
2009; Corr=-.06
Djibouti
Eq. Guinea
2040
6080
100
-.5 0 .5 1
2009; Corr=-.23
Djibouti
Botswana
2040
6080
100
-30 -15 0 15
2009; Corr=-.49
Libya
-20
020
4060
Cha
nge
in T
rade
Fre
edom
-.1 0 .1HP-detrended log real GDP
2009-2004/06; Corr=-.00
Libya
-20
020
4060
-.1 0 .1CF-detrended log real GDP
2009-2004/06; Corr=.17
Libya
-20
020
4060
-.5 0 .5 1Time-detrended log real GDP
2009-2004/06; Corr=.12
Libya
-20
020
4060
-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
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More Statistical Rigor
• Graphs are bivariate• Dynamics ignored• Limited measures of protectionism• Limited measures of business cycle
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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
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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
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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.”
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Table 1: Responsiveness of Protectionism to Business Cycles
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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)
Protection Isn't Counter-Cyclic
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Sensitive?
• Event Study Approach– Focus on Deep Recessions
• Many other protectionist measures on LHS– Many from WDI
• Can substitute unemployment on RHS
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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
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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
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Table A7: Responsiveness of Protectionism to Unemployment
34
Unemployment Lagged Unemployment
Anti-DumpingCases (TTBD), 1978-
.5*(.2)
.03(.2)
CountervailingDuties (TTBD), 1977-
-.0(.2)
-.17(.15)
Safeguards (TTBD),1995-
.03**(.01)
.02*(.01)
WTO Disputes Initiated (WTO), 1995-
-.04(.03)
.01(.03)
Mean Weighted Applied Tariff (WDI), 1988-
-.03(.04)
-.01(.04)
Index of Trade Freedom (IEF), 1995-
.01(.09)
.01(.08)
Protection Isn't Counter-Cyclic
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Results Very Insensitive
• Fixed Effects• Split by Country Income• Split by Country Size• Split by Time• Drop Outliers• Different Estimators• Lags
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Sensitivity: Appendix Table A1No Time Effects (Global BCs)
36
BK CF HP 1D Lt
Anti-DumpingCases (TTBD), 1978-
-13.4(13.1)
5.3(6.1)
-1.2(10.7)
-.06(.05)
3.7(4.1)
CountervailingDuties (TTBD), 1977-
-21.8(25.1)
-11.0(11.9)
-17.8(20.2)
-.09(.05)
-1.0(3.0)
Safeguards (TTBD),1995-
.1(.3)
.4(.4)
-.1(.3)
.001(.001)
-.01(.09)
WTO Disputes Initiated (WTO), 1995-
-1.2(1.6)
1.5(1.4)
.0(1.1)
.02(.02)
.9(.5)
Mean Weighted Applied Tariff (WDI), 1988-
-16.0(17.5)
-2.8(10.3)
-11.7(12.5)
-.02(.02)
-2.6(3.2)
Index of Trade Freedom (IEF), 1995-
8.8(7.8)
-16.5(6.6)
-12.9(6.8)
-.03(.05)
13.3(5.3)
Protection Isn't Counter-Cyclic
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Appendix Table A2No Rich Countries
37
BK CF HP 1D Lt
Anti-DumpingCases (TTBD), 1978-
18.6(27.6)
4.1(15.6)
22.2(22.0)
.1(.1)
14.1(14.4)
CountervailingDuties (TTBD), 1977-
-1.2(5.8)
.1(6.8)
.1(5.7)
-.03(.02)
2.0(2.0)
Safeguards (TTBD),1995-
.3(.4)
.6(.5)
.3(.4)
.002(.002)
-.1(.1)
WTO Disputes Initiated (WTO), 1995-
.3(2.1)
1.4(1.6)
-.1(1.7)
.01(.01)
.5(.8)
Mean Weighted Applied Tariff (WDI), 1988-
9.7(7.4)
6.6(6.5)
7.3(6.4)
.06(.04)
-2.6(3.4)
Index of Trade Freedom (IEF), 1995-
-2.8(9.2)
-4.5(8.3)
-5.9(8.6)
-.01(.05)
3.9(4.2)
Protection Isn't Counter-Cyclic
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Appendix Table A3Only Large Countries
38
BK CF HP 1D Lt
Anti-DumpingCases (TTBD), 1978-
18.8(15.4)
16.6(16.0)
29.5*(13.6)
-.0(.1)
-.3(13.9)
CountervailingDuties (TTBD), 1977-
-5.0(3.7)
-16.4(7.9)
-3.6(3.5)
.03(.07)
-5.1(5.4)
Safeguards (TTBD),1995-
2.1(1.5)
2.1(1.3)
1.9(1.3)
.02(.02)
.4(.5)
WTO Disputes Initiated (WTO), 1995-
-5.4(6.3)
.5(3.0)
-1.9(3.6)
.04(.05)
-.2(1.0)
Mean Weighted Applied Tariff (WDI), 1988-
19.2(22.6)
4.5(19.8)
7.0(18.6)
-.0(.1)
-10.6(6.7)
Index of Trade Freedom (IEF), 1995-
-2.0(16.2)
2.3(13.9)
2.2(14.9)
.1(.1)
20.3(5.4)
Protection Isn't Counter-Cyclic
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Appendix Table A4Sample Ends 2008
39
BK CF HP 1D Lt
Anti-DumpingCases (TTBD), 1978-
17.0(18.6)
9.5(17.9)
20.2(17.4)
-.0(.1)
-2.5(5.0)
CountervailingDuties (TTBD), 1977-
-5.3(21.6)
-13.6(20.0)
-1.7(19.8)
.0(.1)
-9.8(9.0)
Safeguards (TTBD),1995-
.2(.4)
.3(.3)
.1(.3)
.000(.002)
.0(.1)
WTO Disputes Initiated (WTO), 1995-
-.2(2.6)
1.3(2.4)
.2(2.4)
.02(.02)
-.2(.7)
Mean Weighted Applied Tariff (WDI), 1988-
-6.4(6.1)
-4.7(5.4)
-6.9(5.4)
-.01(.03)
-4.1**(1.5)
Index of Trade Freedom (IEF), 1995-
-4.9(6.5)
-5.4(6.1)
-6.7(6.1)
.02(.04)
2.8(1.9)
Protection Isn't Counter-Cyclic
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Appendix Table A5Drop >|2.5σ| Outliers
40
BK CF HP 1D Lt
Anti-DumpingCases (TTBD), 1978-
11.6(12.4)
12.3(13.7)
23.6(11.6)
.04(.07)
-4.2(4.6)
CountervailingDuties (TTBD), 1977-
1.9(3.4)
-.6(3.4)
1.1(3.1)
-.03(.03)
1.2(1.8)
Safeguards (TTBD),1995-
-.0(.1)
-.1(.1)
-.1(.1)
.000(.001)
-.01(.03)
WTO Disputes Initiated (WTO), 1995-
.4(1.8)
1.9(1.0)
1.3(1.1)
.01(.01)
.6(.5)
Mean Weighted Applied Tariff (WDI), 1988-
10.6*(5.2)
7.2(3.8)
4.9(3.8)
-.01(.02)
-2.2(1.2)
Index of Trade Freedom (IEF), 1995-
-7.0(6.1)
-7.9(5.5)
-8.3(5.3)
-.00(.04)
7.0*(3.5)
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Appendix Table A6Different Estimators (Poisson/Tobit)
41
BK CF HP 1D Lt
Anti-DumpingCases (TTBD), 1978-
1.8*(.9)
1.2(1.0)
2.5**(.9)
.01(.01)
1.1(1.0)
CountervailingDuties (TTBD), 1977-
.1(1.5)
-1.3(1.3)
.4(1.3)
-.05**(.02)
-.4(2.3)
Safeguards (TTBD),1995-
12.0(7.3)
10.9*(4.8)
9.8*(4.7)
.06*(.03)
1.9(1.5)
WTO Disputes Initiated (WTO), 1995-
-.7(3.5)
4.3(2.9)
-.2(2.8)
.04(.03)
.0(.8)
Mean Weighted Applied Tariff (WDI), 1988-
-8.6(6.8)
2.5(1.8)
-7.7(5.7)
-.01(.03)
-3.7**(1.3)
Index of Trade Freedom (IEF), 1995-
-7.8(8.0)
-6.8*(3.1)
-7.9(7.1)
.02(.04)
6.8**(1.7)
Protection Isn't Counter-Cyclic
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Appendix Table A8Lagged Output
42
BK CF HP 1D Lt
Anti-DumpingCases (TTBD), 1978-
21.0(13.0)
17.5(12.0)
29.0*(13.3)
.1(.1)
-4.5(9.5)
CountervailingDuties (TTBD), 1977-
-1.2(4.6)
-16.1(8.1)
1.1(4.5)
.01(.02)
-6.2(6.5)
Safeguards (TTBD),1995-
.1(.2)
.1(.4)
-.0(.3)
.001(.002)
.01(.09)
WTO Disputes Initiated (WTO), 1995-
-3.6(2.7)
-.5(1.5)
-2.0(1.9)
.02(.01)
-.3(.8)
Mean Weighted Applied Tariff (WDI), 1988-
-6.0(9.9)
-3.8(6.3)
-7.2(8.7)
-.04(.04)
-4.3(2.9)
Index of Trade Freedom (IEF), 1995-
.4(8.0)
.8(7.6)
4.4(8.0)
.09(.05)
7.1*(3.4)
Protection Isn't Counter-Cyclic
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Graphically
Protection Isn't Counter-Cyclic 43
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
0200
-.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
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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
44Protection Isn't Counter-Cyclic
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Table 3aMacro Controls
45
BK CF HP 1D Lt
Anti-DumpingCases (TTBD), 1978-
-7.4(29.0)
8.3(22.4)
6.0(24.1)
.1(.1)
-49.0(11.5)
CountervailingDuties (TTBD), 1977-
30.1(39.9)
29.7(36.2)
31.2(36.9)
.0(.1)
-45.8(53.4)
Safeguards (TTBD),1995-
-.3(.8)
.1(.7)
-.5(.6)
-.002(.003)
-.1(.2)
WTO Disputes Initiated (WTO), 1995-
-.1(2.5)
3.3(2.9)
-.4(2.0)
.05(.04)
-.5(1.3)
Mean Weighted Applied Tariff (WDI), 1988-
9.3(15.3)
-1.9(13.1)
5.1(12.3)
-.1(.1)
.6(5.7)
Index of Trade Freedom (IEF), 1995-
-27.2(20.5)
-14.5(13.3)
-23.5(17.1)
-.2*(.1)
1.1(9.5)
Protection Isn't Counter-Cyclic
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Table 3bExchange Rate Regime Controls
46
BK CF HP 1D Lt
Anti-DumpingCases (TTBD), 1978-
-3.7(25.0)
-11.9(21.4)
4.5(25.6)
-.1(.1)
-11.0(13.2)
CountervailingDuties (TTBD), 1977-
5.2(13.9)
9.0(16.6)
7.8(16.4)
.02(.08)
-3.2(3.4)
Safeguards (TTBD),1995-
.3(.4)
.7(.4)
.3(.4)
.001(.002)
-.0(.1)
WTO Disputes Initiated (WTO), 1995-
-1.2(3.0)
1.2(1.7)
-.7(2.4)
.03(.02)
-.2(1.2)
Mean Weighted Applied Tariff (WDI), 1988-
-7.5(18.3)
-4.7(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)
Protection Isn't Counter-Cyclic
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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
47Protection Isn't Counter-Cyclic
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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)
48Protection Isn't Counter-Cyclic
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Variation across Time & Countries
• Why might there have been a regime change?• First ask: Why might protectionism be
counter-cyclic at all?
49Protection Isn't Counter-Cyclic
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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
50Protection Isn't Counter-Cyclic
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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
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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
52Protection Isn't Counter-Cyclic
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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
53Protection Isn't Counter-Cyclic
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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
54Protection Isn't Counter-Cyclic
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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
55Protection Isn't Counter-Cyclic
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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
Protection Isn't Counter-Cyclic 56
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Protection Isn't Counter-Cyclic 57
G20<1m05
1015
20W
TO D
ispu
tes
-.4 -.2 0 .2
<1m G20
Population
<4 >2501
23
45
-.1 -.05 0 .05 .1 .15
<4% >25%
Tariffs, % Gov't Rev
FloatFix05
1015
20
-.4 -.2 0 .2
Float Fix
Exchange Rate Regime
G20<1m
020
4060
8010
0Tr
ade
Free
dom
-.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
Tarif
f
-.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?
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Protection Isn't Counter-Cyclic 58
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
ParityUnlimited05
1015
20
-.1 -.05 0 .05 .1 .15
Unlimited Parity
Executive Constraints
HighLow
020
4060
80Tr
ade
Free
dom
-.2 -.1 0 .1 .2 .3
<11 >190
2040
6080
100
-.4 -.2 0 .2
ParityUnlimited
020
4060
8010
0
-.4 -.2 0 .2
HighLow
020
4060
8010
0Ta
riff
-.4 -.2 0 .2
<11>190
2040
6080
-.1 -.05 0 .05 .1
Parity
Unlimited
020
4060
-.1 0 .1 .2
Log real GDP detrended via HP-filter
Protectionism scattered against detrended Output: More Splits of the DataWhat Determines the Cyclicality of Protectionism?
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Protection Isn't Counter-Cyclic 59
>60%<25%05
1015
20W
TO D
ispu
tes
-.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
0Tr
ade
Free
dom
-.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
80Ta
riff
-.1 0 .1 .2
<.72>.850
2040
60
-.1 -.05 0 .05 .1
=0>.150
2040
6080
-.2 -.1 0 .1 .2 .3
Log real GDP detrended via HP-filter
Protectionism scattered against detrended Output: Even More Splits of the DataWhat Determines the Cyclicality of Protectionism?
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Protection Isn't Counter-Cyclic 60
<6>3005
1015
20W
TO
Dis
pute
s
-.4 -.2 0 .2
<6% >30%
Agriculture, % GDP
<40 >6005
1015
20
-.4 -.2 0 .2
<40% >60%
Services, % GDP
<4>1005
1015
20
-.2 -.1 0 .1 .2 .3
<4 >10
Tariff Rate
<6>30
020
4060
8010
0Tr
ade
Free
dom
-.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
80Ta
riff
-.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
Log real GDP detrended via HP-filter
Protectionism scattered against detrended Output: Final Splits of the DataWhat Determines the Cyclicality of Protectionism?
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Figure 9
61Protection Isn't Counter-Cyclic
Non-Member
Member
020
4060
8010
0A
nti-D
umpi
ng
-.2 -.1 0 .1 .2
Non-Member Member
MemberNon-Member0
5010
015
0C
ount
erva
iling
Dut
ies
-.2 -.1 0 .1 .2
Non-Member Member
Member
Non-Member
020
4060
8010
0Tr
ade
Free
dom
-.4 -.2 0 .2
Non-Member
Member020
4060
80A
pplie
d w
eigh
ted
Tarif
f
-.2 -.1 0 .1 .2 .3
Log real GDP detrended via HP-filter
Protectionism, Business Cycles and GATT/WTO Membership
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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
Protection Isn't Counter-Cyclic 62
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-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-.5
0.5
1
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
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-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
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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, …
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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.
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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
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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
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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.”
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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
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Hearing Voices
Query: 'now is not the time for protectionism' 20xx
050
010
0015
00
2000 2004 2008 2012
Query: 'protectionism is a bad idea' 20xx
1000
015
000
2000
0
2000 2004 2008 2012
Annual Google Search Total Results
Anti-Protectionist Chatter is Counter-Cyclic
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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!
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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
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Summary
• Protectionism has not been counter-cyclic since WWII
• Protectionism probably counter-cyclic earlier– Hard to be definitive (data quality, quantity)
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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 …
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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?
76Protection Isn't Counter-Cyclic