How did US and EU trade policy withstand the Great Recession?

During the Great Recession, import protection increased around the world (Evenett, 2011). Popular policies included antidumping tariffs, safeguards, and other temporary trade barriers (Bown 2011a,b). Despite this, for high-income economies such as the US and EU, such trade barriers increased much less than initially feared. In this column, we ask how and why.

High-income economies have low applied import tariffs that are both bound under the WTO and that change infrequently. In response to economic shocks, these economies instead turn to other trade policies such as antidumping tariffs, safeguards, and countervailing duties – here referred to collectively as temporary trade barriers – to implement any new import restrictions. In recent research (Bown and Crowley 2012) we use quarterly data for the US, EU, and three other industrialised economies to estimate the impact of macroeconomic fluctuations on these trade policies for different periods dating back to the 1980s, including through the end of 2010:Q4. These estimates inform our assessment of trade protection during the Great Recession.1

Historical evidence: The responsiveness of temporary trade barriers to macroeconomic shocks

We begin by presenting estimates from a pre-Great Recession sample of panel data at the quarterly frequency for the US (1988:Q1-2008:Q3) and EU (1999:Q1-2008:Q3). Three key historical relationships between macroeconomic fluctuations and new trade barriers stick out.

• First, real appreciations in bilateral exchange rates led to substantial increases in antidumping, safeguards, and related forms of import protection. This result extends earlier evidence (Knetter and Prusa 2003) from the 1980s and 1990s estimated on annual data for the antidumping policy alone. A key insight when examining the first decade of the 2000s is that the impact of an appreciating exchange rate is stronger when considering a broader definition of trade policy changes (e.g. all temporary trade barriers) instead of maintaining a singular focus on antidumping.2
• Second, increases in domestic unemployment rates also trigger new trade barriers. This extends earlier evidence from annual US antidumping data through 2002 dating back to the 1940s (Irwin 2005).
• Third, evidence reinforces a relatively overlooked result by this literature – that policy-imposing economies historically imposed bilateral trade barriers on countries going through their own periods of weak economic growth. To our knowledge, only work by one of us (Crowley 2011), in a study that examines annual US antidumping data from 1980-2001, has highlighted the importance of this relationship. Evidence that potentially WTO-consistent temporary trade barriers were used to protect importing economies from negative growth shocks in their trading partners is broadly consistent with the Bagwell and Staiger (2002) theory of trade agreements that emphasises international externalities as the fundamental problem that trade agreements exist to solve.

Why the heightened concern for protectionism in 2008-2010?

The historical impact of these three sources of macroeconomic volatility – exchange rate shocks, domestic unemployment shocks, and trading partner GDP shocks – set the stage for the fear of a major run-up in new import protection during the Great Recession. Beginning in 2008, unemployment rates rose in both the US and EU. The US dollar and euro appreciated both on a trade-weighted basis and against many other third currencies. Finally, the simultaneous collapse of economic growth around the world implied that almost every major US and EU trading partner went into recession.

Given the perfect storm of these three macroeconomic shocks, forecasts of new temporary trade barriers from our historical models predicted a sharp increase in import product coverage for both the US and EU in 2009. In the quarterly estimates, the grey lines in the two left panels of Figure 1 predict a large spike in imported products that would become subject to new temporary trade barriers in 2009:Q3. In terms of trade values, back of the envelope calculations forecasted new temporary trade barrier import protection during 2008:Q4-2010:Q4 to cover up to an additional 15 percentage points of US and EU non-oil imports. This projected new coverage would have added about five times as much as the entire US and EU stock of imports cumulatively covered by temporary trade barriers in effect at beginning of 2008 (Bown 2011a).

Figure 1. US and EU: Predicted versus realised trade policy response to macroeconomic shocks during 2008:Q4 – 2010:Q4

Source: Bown and Crowley (2012, Figure 4). Prediction of cumulative number of imported 6-digit Harmonised System products from 15 trading partners per quarter subject to new temporary trade barriers. The left panel (dashed line) is based on estimates from a pre-crisis sample of data; the right panel (black line) is based on realised data through 2010:Q4.

The concern with increased “protectionism” coming out of these models corresponds to public sentiment at the time (Bown 2011c Figure 1) and major new trade policy monitoring initiatives by the WTO, World Bank, and Global Trade Alert established to improve transparency and surveillance.

What diluted the trade policy impact of the perfect storm of macroeconomic shocks?

The black lines in the right panels of Figure 1 illustrate how the actual spikes in new US and EU temporary trade barriers were much different than predicted. First and most importantly, the coverage of realised new temporary trade barriers overall was much smaller than model predictions. The US reacted with 16 times fewer new products being covered by these trade barriers than pre-crisis model estimates, the EU with nearly 8 times fewer. The new temporary trade barriers covered only an additional 1%-2% of non-oil imports, much less than the 15% forecasted.

There are two key macroeconomic and behavioural explanations for the differential between prediction and reality.

The first is a change regarding which trading partners the US and EU targeted with new trade barriers. Pre-crisis estimates indicated that new temporary trade barriers coincide with trading partners undergoing weak economic conditions at home. However, during the crisis, both the US and EU “switched” and shifted implementation of any new temporary trade barriers away from trading partners undergoing their own economic contraction towards those experiencing growth. This behavioural change worked to severely dampen the overall incidence of new trade barriers, given that so few trading partners were growing. Nevertheless, still open research questions include the underlying micro-level determinants that led to this macro-level change in behaviour and whether this behavioural change is permanent or temporary.

The second is movements in real exchange rates. Pre-crisis estimates for the US and EU have an appreciating real exchange rate closely followed by a period of heightened temporary trade barriers. Indeed, even for the US during the crisis, it appears that the US increase in new import protection followed the period of the sharply appreciating dollar in 2009:Q1. However, the result for the EU during the crisis is a bit different. The EU delayed its temporary trade barrier increase to the point that model estimates indicate its new temporary trade barriers are associated with the period of the euro depreciation during the crisis.

The larger point on real exchange rate movements common to the US and EU is that, despite both experiencing real appreciations early in the crisis, such movements were reversed almost immediately. Both economies experience sharp and persistent depreciations that continued through 2010. To the extent overvalued real exchange rates trigger new import protection, real depreciations of the dollar and euro likely contributed to relaxing the economic pressure to close import markets in the face of other adverse macroeconomic shocks.

References

Bagwell, Kyle and Robert W. Staiger (2002), The Economics of the World Trading System, The MIT Press.
Bown, Chad P (2011a), "Taking Stock of Antidumping, Safeguards and Countervailing Duties, 1990-2009", The World Economy, 34(12):1955-1998.
Bown, Chad P (ed.) (2011b), The Great Recession and Import Protection: The Role of Temporary Trade Barriers, CEPR and World Bank.
Bown, Chad P (2011c), “Import Protection and the Great Recession”, VoxEU.org, 29 August.
Bown, Chad P and Meredith A Crowley (2012), “Import Protection, Business Cycles, and Exchange Rates: Evidence from the Great Recession”, World Bank working paper No. 6038, April.
Crowley, Meredith A (2011), “Cyclical Dumping and US Antidumping Protection: 1980‐2001”, Federal Reserve Bank of Chicago Working Paper, WP2007:21.
Evenett, Simon (2011), Trade Tensions Mount: The 10th GTA Report, globaltradealert.org, 21 November.
Irwin, Douglas A (2005), “The Rise of U.S. Antidumping Activity in Historical Perspective”, The World Economy, 28:651-668.
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.
Prusa, Thomas J (2011), "United States: Evolving Trends in Temporary Trade Barriers", in Chad P Bown (ed.), The Great Recession and Import Protection: The Role of Temporary Trade Barriers, CEPR and World Bank, pp. 53-83.
Vandenbussche, Hylke and Christian Viegelahn (2011) “European Union: No Protectionist Surprises,” in Chad P Bown (ed.), The Great Recession and Import Protection: The Role of Temporary Trade Barriers, CEPR and World Bank, pp. 85-129.

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1 Prusa (2011) and Vandenbussche and Viegelahn (2011) present extensive, micro-level analysis of the US and EU use of antidumping during this period.

2 In one important example, the US and EU each used their global safeguard policy during 2001-3 to impose new trade barriers on steel products. During the Great Recession, perhaps the highest profile US trade policy change was the 2009 China-specific safeguard used against imports of tires.