The sharp global economic downturn in 2008-09 and the protracted weakness of the global economy have nurtured fears that governments might resort to trade protectionism in order to support their economies by sheltering them from foreign competition. This fear of a rise in protectionism is well-founded given the overwhelming empirical evidence for the time period prior to the financial crisis, showing that governments were more likely to erect trade barriers whenever their economies experienced recessions and/or losses in competitiveness (see Knetter and Prusa 2003, Irwin 2005, Bown 2008, Crowley 2011, Bown and Crowley 2012, 2013).
Despite this historically well-documented countercyclical relationship between growth, competitiveness and trade protectionism, and the observed sluggishness of the global economy, including the recent protracted slowdown in world trade, existing data suggests that G20 governments have so far largely resisted the temptation to move towards more protectionist trade policies (Bown 2011, Kee et al. 2010, Gawande et al. 2011, Vandenbussche and Viegelahn 2011, WTO 2013). This raises the question whether the countercyclical relationship documented for the time period prior to the financial crisis continues to hold.
- On the one hand, it could be that this relationship has broken down, not least as a result of the progressive fragmentation of supply chains across countries that reduce incentives, to shutting domestic markets to foreign producers. If so, fears of a creeping rise in protectionism would be unfounded, and efforts to contain trade-restrictive policies should be directed to other policy issues.
- On the other hand, if the relationship continues to hold, and the limited protectionist response has been due to one-off factors, protectionism may resurface. If so, international coordination within the G20 or the WTO should continue its efforts to contain recourse to protectionist policies.
In a new paper (Georgiadis and Gräb 2013), we examine the relationship between growth, real exchange rates, and G20 economies’ recourse to trade protectionist policies since the financial crisis. The trade policy data we study stem from the Global Trade Alert and feature – in addition to traditional tariff and trade defence – the recently important ‘murky’ measures (see Baldwin and Evenett 2009, Evenett and Wermelinger 2010, Cernat and Madsen 2011). Murky trade policies comprise state measures that may, at least potentially, abuse legitimately created policy space granted in international trade agreements, or that are beyond the latter’s reach in order to discriminate against foreign producers. Examples for murky measures are health and safety regulations, or buy-local clauses in stimulus and bailout packages. The need to include murky measures into the analysis of trade policies since the financial crisis is corroborated by evidence that they might have a stronger effect on trade flows than traditional trade policies (Henn and McDonald 2011).
Our empirical approach is to relate the number of trade-restrictive measures implemented by individual G20 economies to domestic and trading partners’ real GDP growth, as well as the real bilateral exchange rate. Our major findings regarding the recourse to trade-restrictive policies by G20 economies since the financial crisis are as follows (see our paper for estimation details):
- A drop in domestic real GDP growth by one percentage point typically resulted in an increase in the number of newly implemented trade-restrictive measures by 4.4%.
- A real appreciation of the domestic currency by 1% was typically followed by an additional 1% of trade-restrictive measures.
- Weaker growth of a trading partner did not induce G20 economies to erect any additional barriers to trade.
Our results thus suggest that the relationship between growth, competitiveness, and protectionism documented for the time period prior to the financial crisis continues to hold, except for trading partners’ growth, which does not appear to play a role in the determination of recent trade policies. The latter result is consistent with the findings of Bown and Crowley (2013), and may be one reason why the recourse to protectionist policies has been relatively muted so far.
Further refinements of the analysis reveal heterogeneities in the recourse to trade-restrictive policies across implementing G20 economies, as well as across affected G20 and non-G20 countries. In particular, G20 advanced economies resorted more strongly to trade-restrictive policies in response to declines in domestic growth and losses in competitiveness than G20 emerging market economies. Also, G20 economies resorted more strongly to trade-restrictive policies in response to losses in competitiveness vis-à-vis non-G20 economies than vis-à-vis peer G20 economies.
Our analysis also suggests that G20 economies typically employed the entire spectrum of trade policies in response to changes in domestic growth and competitiveness (see our paper for details). In particular, we find that a drop in domestic growth and a loss in competitiveness were typically followed by governments implementing new murky tariff, as well as trade defence, measures.
It should be clear that the longer it takes for the global economy to recover, the more hazardous it is to believe that – although benign so far – trade policies will remain relatively non-discriminatory. G20 governments have to withstand demands for trade protectionism, and five years after the financial crisis this becomes more difficult the longer their economies do not gain momentum. Thus, efforts to strengthening peer pressure and international coordination within the G20 and other international bodies, as well as monitoring by trade watchdogs, such as the WTO and the Global Trade Alert, need to be undertaken ever more forcefully.
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