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Protection and the Business Cycle

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  • Bagwell Kyle

    ()
    (Columbia University)

  • Staiger Robert W.

    ()
    (University of Wisconsin, Madison)

Abstract

Empirical studies have repeatedly documented the countercyclical nature of trade barriers. In this paper, we propose a simple theoretical framework that is consistent with this and other empirical regularities in the relationship between protection and the business cycle. Focusing on self-enforcing trade agreements, we find theoretical support for countercyclical movements in protection levels. The fast growth in trade volume that is associated with a boom phase facilitates the maintenance of more liberal trade policies than can be sustained during a recession phase in which growth is slow. We also find that acyclic increases in the level of trade volume give rise to protection, implying that whether rising imports are met with greater liberalization or increased protection depends on whether they are part of a cyclic upward trend in trade volume or an acyclic increase in import levels.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 3 (2003)
Issue (Month): 1 (September)
Pages: 1-45

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Handle: RePEc:bpj:bejeap:v:advances.3:y:2003:i:1:n:3

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  1. Kyle Bagwell & Robert W. Staiger, 1995. "Collusion Over the Business Cycle," Discussion Papers 1118, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the Trade Balance and the Terms of Trade: The S-Curve," NBER Working Papers 4242, National Bureau of Economic Research, Inc.
  3. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
  4. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September.
  5. Kyle Bagwell & Robert W. Staiger, 1996. "Reciprocal Trade Liberalization," Discussion Papers 1150, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Bagwell, Kyle & Staiger, Robert W, 1990. "A Theory of Managed Trade," American Economic Review, American Economic Association, vol. 80(4), pages 779-95, September.
  7. Jean-Pierre DANTHINE & John B. DONALDSON, 1991. "Methodological and Empirical Issues in Real Business Cycle Theory," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9102, Université de Lausanne, Faculté des HEC, DEEP.
  8. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  9. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  10. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
  11. Hansen, John Mark, 1990. "Taxation and the political economy of the tariff," International Organization, Cambridge University Press, vol. 44(04), pages 527-551, September.
  12. Bohara, Alok K & Kaempfer, William H, 1991. "A Test of Tariff Endogeneity in the United States," American Economic Review, American Economic Association, vol. 81(4), pages 952-60, September.
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Cited by:
  1. Richard Chisik, 2010. "Trade Disputes, Quality Choice, and Economic Integration," Working Papers 022, Ryerson University, Department of Economics.
  2. Kyle Bagwell & Robert W. Staiger, 2000. "GATT-Think," NBER Working Papers 8005, National Bureau of Economic Research, Inc.
  3. Chad Bown & Meredith Crowley, 2011. "Import protection, business cycles, and exchange rates: evidence from the Great Recession," Working Paper Series WP-2011-16, Federal Reserve Bank of Chicago.
  4. Bagwell,K. & Staiger,R.W., 2004. "Enforcement, private political pressure and the GATT/WTO escape clause," Working papers 23, Wisconsin Madison - Social Systems.
  5. Conconi, Paola & Sahuguet, Nicolas, 2005. "Re-election Incentives and the Sustainability of International Cooperation," CEPR Discussion Papers 5401, C.E.P.R. Discussion Papers.
  6. Opp, Marcus M., 2010. "Tariff wars in the Ricardian Model with a continuum of goods," Journal of International Economics, Elsevier, vol. 80(2), pages 212-225, March.
  7. Liu, Xuan, 2007. "Trade Openness and the Cost of Sudden Stops: The Role of Financial Friction," MPRA Paper 18260, University Library of Munich, Germany, revised 26 Oct 2009.
  8. Simon P. Anderson & Nicolas Schmitt, 2003. "Nontariff Barriers and Trade Liberalization," Economic Inquiry, Western Economic Association International, vol. 41(1), pages 80-97, January.
  9. Hazel Parcon, 2008. "Disaggregating PTAs at the Role of International Division of Labor on PTA Formation," Working Papers 200806, University of Hawaii at Manoa, Department of Economics.

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