Emerging-economy trade policy has become more responsive to economic shocks under the WTO

Chad P Bown, Meredith Crowley, 8 February 2013

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The use of temporary protection has spread like wildfire in recent years. Even if these measures – antidumping and anti-subsidy duties for example – are perfectly consistent with WTO trade rules, there are worries that this signals a shift to protectionism (Baldwin and Evenett 2012 and Aggarwal and Evenett 2012). But there is an alternative view. Temporary protection may facilitate trade liberalisation – just as easy firing can encourage hiring.

In line with this ‘escape value’ function of temporary protection, there is a long-standing ‘stylised fact’ – dating back to at least the Great Depression – that import restrictions are countercyclical (Irwin 2011, 2012). The recent historical record, however, is less clear.

  • Some work finds that the application of new temporary trade barriers responds countercyclically to domestic macroeconomic slowdowns in high-income economies (Bown and Crowley 2013a).
  • Other studies that include both industrialised and emerging economies stand in contrast to this portrait of countercyclical trade policy and find little or no evidence that other types of trade restrictions respond to the business cycle (Kee, Neagu and Nicita, forthcoming)1.

New research

In a new paper (Bown and Crowley 2013b), we examine emerging economies’ application of new import restrictions through the lens of a particularly important class of trade policies – the temporary trade barriers of antidumping, safeguards, and countervailing duties. The analysis considers 13 emerging economies over 1989-2010; together these economies accounted for 21% of world merchandise imports and 22% of world GDP by 2010. For a number of these emerging economies during this period, temporary trade barriers covered an economically significant share of their imported products. The punchline of the new evidence is that some trade policy has become more countercyclical for emerging economies since the establishment of the WTO!

Our specific approach is to examine the impact of macroeconomic fluctuations – e.g., domestic and trading-partner real GDP growth, domestic changes to unemployment, real-exchange-rate changes, and aggregate import growth – on the application of new import restrictions through temporary trade barriers. The exercise carefully constructs measures of new import restrictions at the universally defined, six-digit Harmonised System product level so as to investigate important questions regarding trade policy in emerging economies:

  • Which macroeconomic factors drive changes to trade policies?
  • How have promises made by emerging economies to WTO members regarding maximum tariff rates (i.e., 'tariff binding' commitments) affected the application of new import restrictions through temporary trade barriers?
  • Has the institutional framework of the WTO itself affected the responsiveness of new import restrictions to economic shocks?

The approach is first to consider the baseline, benchmark WTO period of 1995-2010. Many emerging countries2 first became subject to a common set of rules regarding temporary trade barriers usage when they joined the WTO. The evidence presents a broad confirmation of the pattern established for industrialised economies in Bown and Crowley (2013a): i.e., emerging economies also imposed new bilateral import restrictions in response to weak domestic real-GDP growth, increases in the domestic unemployment rate, weak real-GDP growth in foreign trading partners, and strong bilateral import growth.

The second finding is that substitution across trade policy instruments is an important factor behind the implementation of new import-restricting temporary trade barriers in emerging economies. Emerging-economy members of the WTO impose more temporary trade barriers when a larger share of imported products have applied tariff rates equal to the maximum binding tariff rates that the country promised to its fellow WTO members. This result is consistent with the idea that countries that wish to restrict imports turn to WTO-permissible policy instruments – e.g., antidumping, countervailing duties, and safeguards – when WTO commitments constrain their ability to raise applied import tariffs.

The identification of this second result is apparent from the simple characterisation of the data presented in Table 1. The first three columns set the stage by indicating, for each country, the share of imported products that it has legally 'bound' under the WTO, the share of imports covered by its temporary trade barriers in 1995, and the share of imports covered in 2010, respectively. These three columns indicate substantial heterogeneity across countries and time. Next we break out all imported products in all years into two categories – those that were subject to a new temporary trade barrier and those that were not – and we then match the products to data on their applied most-favoured-nation tariffs and WTO-binding tariff rates in the prior year. A comparison of column (9) with column (10) indicates that, for most countries in our sample – e.g., Argentina, Brazil , China, India, Indonesia, Mexico, South Africa, Peru and Thailand – new temporary trade barriers are disproportionately imposed on products that are subject to WTO disciplines that constrain their applied import tariffs. This suggests that some policy substitution is taking place; i.e., when tariff increases become impermissible under the WTO, emerging economies are turning to temporary trade barriers.

Table 1. Temporary trade barriers (TTB) and WTO disciplines over tariffs

Source: Bown and Crowley (2013b, Table 1). All data computed from the HS-06 level. Column (1) is from WTO (2011), columns (5) and (6) are from Bown (2012a). Columns (9) and (10) calculated by the authors for each year, 1995-2010, and then time-averaged; note that ‘under WTO discipline’ is defined as products for which the applied MFN tariff rate is no more than ten percentage points lower than the binding. Column (9) is the share of products with a new TTB imposed in year t+1 that is under WTO discipline in year t. Column (10) is the share of products with no new TTB imposed at t+1 that is under WTO discipline in year t.

Finally, as a third empirical exercise, the paper compares the determination of new temporary trade barriers under the GATT (1989-1994) versus WTO (post-1995) periods. There turns out to be significant and robust evidence of a change in the way aggregate fluctuations affect trade policy through temporary trade barriers under the WTO compared to the GATT. We have already established that after inception of the WTO in 1995, weak domestic GDP growth, rising domestic unemployment, and exchange rate appreciations led to more products becoming subject to new temporary trade barriers. Before the establishment of the WTO, these relationships are not evident in the data. This suggests that the WTO period has impacted emerging economies by affecting the responsiveness of these import-restricting policies to real economic shocks. In fact, under the WTO, it also turns out that emerging-economy trade policy responsiveness to economic shocks is quite similar to that found for high-income countries (Knetter and Prusa, 2003; Bown and Crowley, 2013a).

Policy implications?

While it might be premature to draw definitive implications for policy from this early research, it is clear that understanding whether and how trade policy responds to economic shocks is increasingly important for the multilateral trading system.

  • On the one hand, there is potential cause for concern if it turns out that emerging economies’ commitments to a more liberal trading regime are being unwound by the reapplication of import restrictions through temporary trade barriers (Bown and Tovar 2011).
  • On the other hand, the application of temporary trade barriers in response to economic shocks is potentially consistent with theories of cooperative trade agreements that may require inclusion of “safety valve” provisions to remain sustainable (Bagwell and Staiger 1990, Bown and Crowley 2013c).

If sufficiently limited in application, temporary trade barriers that respond to unexpected events may provide the necessary flexibility that allows an overarching liberal trade agreement to survive.

References

Aggarwal, Vinod K and Simon J Evenett (2012) “Industrial policy choice during the crisis era”, Oxford Review of Economic Policy 28(2): 261-283. 

Baldwin, Richard E and Simon J Evenett (2012) “Beggar-thy-neighbour policies during the crisis era: causes, constraints, and lessons for maintaining open borders”, Oxford Review of Economic Policy 28(2): 211-234.

Bagwell, Kyle and Robert W Staiger (1990) “A Theory of Managed Trade,” The American Economic Review 80(4): 779-795.

Bown, Chad P and Meredith A Crowley (2013a) “Import Protection, Business Cycles, and Exchange Rates: Evidence from the Great Recession”, Journal of International Economics, forthcoming.

Bown, Chad P and Meredith A Crowley (2013b) “Emerging Economies, Trade Policy, and Macroeconomic Shocks”, World Bank Policy Research Working Paper No. 6315, January.

Bown, Chad P and Meredith A Crowley (2013c) “Self-Enforcing Trade Agreements: Evidence from Time-Varying Trade Policy," The American Economic Review 103(2).

Bown, Chad P and Patricia Tovar (2011) “Trade Liberalization, Antidumping, and Safeguards: Evidence from India's Tariff Reform”, Journal of Development Economics 96(1): 115-125.

Irwin, Douglas A (2012) Trade Policy Disaster: Lessons from the 1930s, Cambridge: MIT Press.

Irwin, Douglas A (2011) Peddling Protectionism: Smoot-Hawley and the Great Depression, Princeton: Princeton University Press.

Kee, Hiau Looi, Cristina Neagu, and Alessandro Nicita (forthcoming) “Is Protectionism on the Rise? Assessing National Trade Policies During the Crisis of 2008”, The Review of Economics and Statistics.

Knetter, Michael M and Thomas J Prusa (2003) “Macroeconomic Factors and Antidumping Filings: Evidence from Four Countries”, Journal of International Economics 61(1): 1-17.

Rose, Andrew K (2012) “Protectionism Isn't Counter‐Cyclic (anymore)”, NBER Working Paper No. 18062, May.


1 Rose (2012) assesses annual data on samples of over 100 countries under various measures of 'protectionism' and concludes trade policy is not countercyclical from the 1980s through 2009.

2 China became subject to these common WTO rules with its accession in 2001.

Topics: International trade
Tags: antidumping, protectionism, temporary trade barriers, WTO

Senior Economist, Development Research Group, Trade and International Integration (DECTI), World Bank

Senior Economist in the Economic Research Department, Federal Reserve Bank of Chicago

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