Is Protectionism Rational Under the Financial Crisis? Analysis from the Perspective of International Political Relations

Protectionism against economic globalization (free trade and FDI) always surges in the financial crises as the pressure from unemployment mounts. This paper aims to assess the rationality of the protectionism. Instead of analyzing from the pure economic efficiency perspective, this paper assesses the rationality of protectionism from the political relation perspective. By building a costly signal model, we demonstrate that the financial crisis does not change the role of trade and FDI as a signal to reduce the international conflicts and foster cooperation among countries. By employing simultaneous equation models, it is empirically found that trade/FDI and cooperation exhibit significant positive reciprocity, even in the presence of the shock. Variance decompositions from generalized VAR indicate that trade and FDI work in complement to each other to increase the cooperation. It is therefore concluded that using protectionism as a measure to deal with financial crisis is not a well-grounded policy.