Economic Crises and Trade Policy Competition

Abstract

How do crises affect trade policy? This article reconciles starkly diverging accounts in the literature by showing that economic adversity generates endogenous incentives not only for protection, but also for liberalization. It first formally develops the mechanisms by which two features of shocks –intensityandduration– influence the resources and political strategies of distressed firms. The central insight is that policy adjustments to resuscitate afflicted industries typically generate ‘knock-on’ effects on the profitability and political maneuverings of other firms in the economy. The study incorporates these countervailing pressures in its analysis of trade policy competition. In the wake of crises, protection initially increases when affected firms lobby for assistance, but then decreases as industries run low on resources to expend on lobbying and as firms in other industries mobilize to counter-lobby. The theoretical predictions are tested using sub-national and cross-national data, and real-world illustrations are presented to highlight the mechanisms driving the results.