Import Protection, Business Cycles, and Exchange Rates: Evidence from the Great Recession (REVISED April 2012)

This paper uses quarterly data for the United States, European Union, and three other industrialized economies to estimate the impact of macroeconomic fluctuations on import protection policies over 1988:Q1-2010:Q4. First, estimates on a pre-Great Recession sample provide evidence of three key relationships for the US and EU. Increases in domestic unemployment rates and real appreciations in bilateral exchange rates led to substantial increases in antidumping and related forms of import protection. Furthermore, a previously overlooked result is that economies historically imposed these bilateral import restrictions on trading partners that were going through their own periods of weak economic growth. Second, we use estimates from the pre-Great Recession model to predict the trade policy response during 2008:Q4-2010:Q4, given the realized macroeconomic shocks. We find new US and EU trade barriers were projected to cover up to an additional 15 percentage points of nonoil imports, well above the baseline level of 2-3 percent of import coverage immediately preceding the crisis. Third, we re-estimate the model on data from the Great Recession period in order to examine why the realized trade policy response differed from model predictions based on historical data. While exchange rate movements played an important role in limiting new import protection, the US and EU also “switched” from their historical behavior during the Great Recession and shifted new import protection toward those trading partners experiencing economic growth and away from those that were contracting.