Protectionism and the Business Cycle

Abstract

We study the consequences of protectionism for macroeconomic fluctuations. First, using highfrequency trade policy data, we present fresh evidence on the dynamic effects of temporary trade barriers. Estimates from country-level and panel VARs show that protectionism acts as a supply shock, causing output to fall and inflation to rise in the short run. Moreover, protectionism has at best a small positive effect on the trade balance. Second, we build a small open economy model with firm heterogeneity, endogenous selection into trade, and nominal rigidity to study the channels through which protectionism affects aggregate fluctuations. The model successfully reproduces the VAR evidence and highlights the importance of aggregate investment dynamics and micro-level reallocations for the contractionary effects of tariffs. We then use the model to study scenarios where temporary trade barriers have been advocated as potentially beneficial, including recessions with binding constraints on monetary policy easing or in the presence of a fixed exchange rate. Our main conclusion is that, in all the scenarios we consider, protectionism is not an effective tool for macroeconomic stimulus.

Effective Trade Costs and the Current Account

“…Note that both ex j i and τ j ni contribute to the asymmetry in bilateral trade costs between trading partners; that is, τ j ni = τ j in . In addition, since ex j i directly affects exporter fixed effects in this formulation, we can use the importer fixed effect estimated via the gravity method to compute comparative advantage-after following the same double normalization procedure illustrated in Equations (8) and (9).…”

The Real Exchange Rate, Innovation and Productivity

“…Worldbase (Dun and Bradstreet) provides plant-level information of production activities, export and import status and plant ownership for the same set of countries as Orbis. 15 We use an algorithm to match firms in the two data sets based on company names. We use the export and import status in the first year the firm reports this information and are able to match around 177,000 firms.…”

“…3 In this way, we can consider RER movements as shifts in the relative price of tradables that operate as demand shocks which are exogenous to individual firms and Magud et al (2011) and references therein for a discussion. 2 Barattieri et al (2017), for example, analyze macro-level effects of recent trade policy, in particular anti-dumping. 3 We perform several alternative analyses.…”

Economic and Policy Uncertainty: Export Dynamics and the Value of Agreements

“…While our results indicate an initial increase in uncertainty in WTO members-the large majority of the non-PTA countries in our sample-it did not translate into substantial protection and the risk receded partially, perhaps because of WTO monitoring mechanisms and commitments. 8 Thus we contribute to the understanding of policy flexibility and potential protectionism over the business cycle (Bagwell and Staiger, 2003;Barattieri et al, 2017) and the role of trade policy commitments in the presence of economic and lobbying shocks (Amador and Bagwell, 2013;Beshkar et al, 2015;Limão and Maggi, 2015) and the implications of potentially high tariffs if cooperation breaks down (Nicita et al, forth. ;Ossa, 2014).…”