Good times and bad times, with endogenous trade policy responses

Globalisation is associated with long periods of sustained economic growth and credit expansion, whereas major recessions tend to lead to falling trade and protectionism. I investigate this, using a model where an important component of trade is search by rms trying out new trade part- ners. To model this, I set up a schematic model of upstream-downstream matching between rms, where match quality determines prots. Prior to globalisation, Northern upstream and downstream rms work together, to avoid trade costs. As trade is liberalised, new North-South matches begin to develop, but at rst these are footloose (since many are experimental in nature), and can be driven out rapidly if there is a demand crisis. The presence of a highly elastic, searching element of trade, during pe- riods of global liberalisation and fast growth means that countries cannot gain terms-of-trade advantage from protection. By contrast, if a prolonged recession drives out searching rms, the remaining trade is relatively price- inelastic, and beggar-thy-neighbour taris become attractive. Such observations are consistent with the rapid and damaging switch to protectionism after the 1929 Stock Market Crash, and emphasise the need for continued multilateral commitment to trade liberalisation, in the aftermath of the 2008 Great Trade Recession.