Import protection and the Great Recession

Chad Bown

While the Great Recession has not led to a massive global resort to protectionism, governments have nevertheless been active with their trade policy during the crisis. This column explores how governments adjusted the scale and composition of their temporary trade barriers – antidumping, safeguard, and countervailing-duty policies –during the crisis, as well as how policy use fits recent historical context and creates the need for post-crisis policy reform.

The global economic contraction of 2008-09 and the trade collapse stoked concern over a return to Great Depression-like economic conditions and autarkic government policies, including resort to new trade barriers (see Evenett 2011). Figure 1 illustrates this clear concern through the time-series pattern of Internet searches as reported by Google Trends – public interest in the “Great Depression” spiked in October 2008 shortly after the collapse of Lehman Brothers, and curiosity over “Protectionism” followed closely thereafter, peaking in February 2009.

Figure 1. Increased public interest in the Great Depression and protectionism during 2008-09

Source: Bown 2011a, Figure 1.3. Underlying source of data is Google Trends.

Trade policy monitoring during the crisis

It became clear at least by mid-2009 that previously undetected protectionism had not caused the 2008-09 trade collapse; Baldwin (2009) attributes the collapse to other demand and supply factors. Nevertheless, concern over trade barriers remained, though the protectionism focus quickly shifted to causality moving in the other direction – that rising unemployment and worsening macroeconomic conditions could create a powder keg that would set off populist initiatives for policymakers to erect new trade barriers. For the economic evidence indicated that, while the US Smoot-Hawley tariffs and the international retaliatory response did not cause the economic contraction of the Great Depression (Irwin 2011), these newly established trade barriers of the early 1930s ultimately helped prevent a reversal of the “Kindleberger Spiral” decline of global trade (Kindleberger 1973), thus serving as a hindrance as countries sought to grow and escape macroeconomic calamity. In 2009, similar concerns took hold that a repeat protectionist performance would impede a V-shaped trade recovery and create barriers to resumed global growth and revival from economic catastrophe.

In late 2008 and early 2009, the international community responded to concerns over potential forces of “protectionism” by organising major new trade-policy monitoring initiatives – including those led by the World Bank, Global Trade Alert, and the World Trade Organisation.1 While the efforts received substantial media attention, the monitoring initiatives were ultimately somewhat hampered in the immediate term. In particular, the lack of a comprehensive time series of pre-crisis data against which to benchmark within-crisis policy changes to tariffs and non-tariff barriers meant analysts had trouble assessing whether the scale of protectionist forces was growing, shrinking, or staying the same – relative to what was normal (ie, absent a macroeconomic crisis), let alone what to anticipate during such a deep recession. This revealed a considerable lack of preparedness by the trade-policy community.

New research using crisis-era data

In recent research (Bown 2011a), I present 11 economy-specific case studies that empirically examine trade-policy changes taking place between 2008-09. The studies use product-level data from the World Bank’s Temporary Trade Barriers Database, and they build upon a relatively simple methodological innovation (see Bown 2011b) designed to improve the information content of trade-policy monitoring of temporary trade barriers – antidumping, safeguard, and countervailing-duty policies. Unlike most previous research on crisis-era protectionism, the studies also put the 2008-09 trade-policy changes into historical context, combining data on temporary trade barriers with information on trade flows, changing economic conditions, and other adjustments to trade policy. And while the focused analysis on such barriers does not take into consideration all policy changes affecting market access, they have turned out to be an important component of changes in crisis-era protectionism, especially for the G20 economies (see Evenett 2011 and Kee et al forthcoming).

The methodological approach examines not only the traditional “flow” of new barriers that countries impose at any point in time, but also the accumulated “stock” of imported products and trade flows that governments subject to such barriers. It introduces two straightforward methods – the first relies on simple averages of counts of affected imported products, and the second trade-weights the product-level imports by their pre-barrier share of the economy’s total imports.

Evidence aggregated using the first method across the major G20 economies suggests that these countries collectively increased the set of imported products covered by temporary barriers by 25% by the end of 2009, relative to the immediate pre-crisis level of 2007. Nevertheless, as Figure 2 illustrates, this was almost entirely the result of an increasing stock of barriers imposed by emerging economies -- for these countries, import-product coverage increased by 40%. Somewhat surprisingly, recession-ravaged high-income markets increased their products covered by barriers by less than 4% between the end of 2007 and 2009.

Figure 2. Major G20 developed versus developing economy imported products collectively affected by temporary trade barriers, 1997-2009

Source: Bown 2011b, Figure 3. TTBs=temporary trade barriers, which is the aggregation of AD= antidumping, CVD=countervailing duty, SG=global safeguard, CSG=China-specific transitional safeguard.

Furthermore, there is substantial variation within the set of emerging markets in particular. Table 1 outlines the growth of imported products covered by temporary trade barriers by the end of 2009 as compared to pre-crisis levels of 2007. Its evidence considers the two different measures. The first three columns report the simple average using the count of affected imported products while the last three columns report the trade-weighted average that relies on the value of imports. According to the first measure, India, Argentina, Turkey, and Brazil increased substantially – by between 20% and 70% – the share of imported products over which they had imposed barriers between 2007 and 2009. Nevertheless, trade weighting in the last three columns reveals that such barriers varied in their economic importance, and in some instances new barriers were more than offset by removals of previously imposed barriers that were economically quite sizeable.

Thus, unlike other previous approaches to assessing the scale and impact of temporary trade barriers, a focus on the “stock” of barriers also allows for examination of another important margin of trade-policy changes – ie, whether economies are removing previously imposed barriers according to schedule. For a number of high-income and emerging economies, there is growing evidence of the inability to remove previously imposed temporary trade barriers in a timely manner. However, there are exceptions. The cause of the Mexican decline in barrier-affected imports in Table 1 is due to its following through with the announced removal of previously imposed antidumping measures on hundreds of products from China in 2008 – albeit measures that had been imposed since 1993.

Table 1. The crisis: Predicted vs. realised economies’ stocks of imposed temporary trade barriers in 2009

Source: Bown 2011b, Table 2, and author’s calculations. *Not including Mexico. Predictions in (3) and (6) based on simple linear time trend with data through 2007.

A final takeaway from the table is inspired by Figure 2. Some emerging markets were covering more and more imports with barriers long before the crisis began in 2008. Columns (3) and (6) present simple forecasts for each economy’s barrier coverage in 2009 based on historical trend alone (through 2007), ie, without taking into account changes in macroeconomic conditions that might induce additional spikes in barrier coverage. For a number of emerging markets, it is difficult to rule out that even the increase in the stock of TTB product coverage in 2008-2009 is unrelated to the economic calamity of the Great Recession. It may simply be part of a worrisome longer-term trend that the gains achieved through most favored nation and preferential trade liberalisation over the previous 20 years are being eroded through temporary trade barriers.

Lessons learned and open questions

The new research reveals:

Temporary trade barriers are expanding to cover more imported products for a number of major emerging markets.

Furthermore, because they are discretionary and can be implemented on a discriminatory basis, they are being reoriented over time to increasingly affect South-South trade. This is not limited to China’s exports – a number of emerging-market exports are increasingly impacted by temporary trade barriers and this has important implications for development.

Despite the Uruguay Round’s introduction of sunset provisions designed to curtail the duration of imposed antidumping measures, there is increasing evidence for both high-income and emerging economies that the “stock” of imposed temporary trade barriers is affected through supposedly temporary trade barriers becoming quasi-permanent protection (Prusa 2011; Chandra 2011).

What allowed the global economy to remain relatively open despite the 2008-09 crisis, and why did the protectionist response take on its realised form? For scholars to address this question it is important to get the facts straight. The evidence from temporary trade barriers is that governments had quite a bit of churning in their trade policies in 2008-09. Monitors of trade policy need to be better prepared and to provide more information during the next crisis. Allowing them to do better requires an increased commitment to transparency and resources for data collection.

References

Baldwin, Richard (ed.) (2009), The Great Trade Collapse: Causes, Consequences and Prospects, A VoxEU.org Publication, 27 November.

Bown, Chad P (2011a), “Introduction”, in Chad P Bown (ed.), The Great Recession and Import Protection: The Role of Temporary Trade Barriers, CEPR and the World Bank.

Bown, Chad P (2011b), “Taking Stock of Antidumping, Safeguards, and Countervailing Duties, 1990-2009”, The World Economy, forthcoming.

Bown, Chad P (2010), “Temporary Trade Barriers Database”, The World Bank.

Chandra, Piyush (2011), “China: A Sleeping Giant of Temporary Trade Barriers?”, in Chad P Bown (ed.), The Great Recession and Import Protection: The Role of Temporary Trade Barriers, CEPR and the World Bank.

Evenett, Simon (2011), “Resolve falters as global prospects worsen: The 9th GTA report”, globaltradealert.org, 20 July.

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

Kindleberger, Charles (1973), The World in Depression, 1929-1939. University of California Press.

Prusa, Thomas J (2011), “USA: 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 the World Bank.