There is new evidence that emerging economies are now tying variable protection more closely to business cycles and exchange rates?just like the high-income economies

Chad P Bown & Meredith Crowley

The use of temporary protection has spread like wildfire in recent years. Even if these measures?anti-dumping and anti-subsidy duties for example?are perfectly consistent with WTO trade rules, there are worries that this signals a shift to protectionism (Baldwin and Evenett 2012 and Aggarwal and Evenett 2012). But there is an alternative view. Temporary protection may facilitate trade liberalisation?just as easy firing can encourage hiring.

In line with this ?escape value? function of temporary protection, there is a long-standing ?stylised fact??dating back to at least the Great Depression?that import restrictions are countercyclical (Irwin 2011, 2012). The recent historical record, however, is less clear.

Some work finds that the application of new temporary trade barriers responds counter-cyclically to domestic macroeconomic slowdowns in high-income economies (Bown and Crowley 2013a).

Other studies that include both industrialised and emerging economies stand in contrast to this portrait of countercyclical trade policy and find little or no evidence that other types of trade restrictions respond to the business cycle (Kee, Neagu and Nicita, forthcoming).

New research

In a new paper (Bown and Crowley 2013b), we examine emerging economies? application of new import restrictions through the lens of a particularly important class of trade policies?the temporary trade barriers of anti-dumping, safeguards, and countervailing duties. The analysis considers 13 emerging economies over 1989-2010; together these economies accounted for 21% of world merchandise imports and 22% of world GDP by 2010. For a number of these emerging economies during this period, temporary trade barriers covered an economically significant share of their imported products. The punchline of the new evidence is that some trade policy has become more countercyclical for emerging economies since the establishment of the WTO!

Our specific approach is to examine the impact of macroeconomic fluctuations?for example, domestic and trading-partner real GDP growth, domestic changes to unemployment, real-exchange-rate changes, and aggregate import growth?on the application of new import restrictions through temporary trade barriers. The exercise carefully constructs measures of new import restrictions at the universally defined, six-digit Harmonised System product level so as to investigate important questions regarding trade policy in emerging economies:

* Which macroeconomic factors drive changes to trade policies?

* How have promises made by emerging economies to WTO members regarding maximum tariff rates (i.e., ?tariff binding? commitments) affected the application of new import restrictions through temporary trade barriers?

* Has the institutional framework of the WTO itself affected the responsiveness of new import restrictions to economic shocks?

The approach is first to consider the baseline, benchmark WTO period of 1995-2010. Many emerging countries2?first became subject to a common set of rules regarding temporary trade barriers usage when they joined the WTO. The evidence presents a broad confirmation of the pattern established for industrialised economies in Bown and Crowley (2013a): i.e., emerging economies also imposed new bilateral import restrictions in response to weak domestic real-GDP growth, increases in the domestic unemployment rate, weak real-GDP growth in foreign trading partners, and strong bilateral import growth.

The second finding is that substitution across trade policy instruments is an important factor behind the implementation of new import-restricting temporary trade barriers in emerging economies. Emerging-economy members of the WTO impose more temporary trade barriers when a larger share of imported products have applied tariff rates equal to the maximum binding tariff rates that the country promised to its fellow WTO members. This result is consistent with the idea that countries that wish to restrict imports turn to WTO-permissible policy instruments?for example, anti-dumping, countervailing duties, and safeguards?when WTO commitments constrain their ability to raise applied import tariffs.

The identification of this second result is apparent from the simple characterisation of the data presented in the table above. The first three columns set the stage by indicating, for each country, the share of imported products that it has legally ?bound? under the WTO, the share of imports covered by its temporary trade barriers in 1995, and the share of imports covered in 2010, respectively. These three columns indicate substantial heterogeneity across countries and time. Next we break out all imported products in all years into two categories?those that were subject to a new temporary trade barrier and those that were not?and we then match the products to data on their applied most-favoured-nation tariffs and WTO-binding tariff rates in the prior year. A comparison of column (9) with column (10) indicates that, for most countries in our sample?for example, Argentina, Brazil , China, India, Indonesia, Mexico, South Africa, Peru and Thailand?new temporary trade barriers are disproportionately imposed on products that are subject to WTO disciplines that constrain their applied import tariffs. This suggests that some policy substitution is taking place; i.e., when tariff increases become impermissible under the WTO, emerging economies are turning to temporary trade barriers.

Finally, as a third empirical exercise, the paper compares the determination of new temporary trade barriers under the GATT (1989-1994) versus WTO (post-1995) periods. There turns out to be significant and robust evidence of a change in the way aggregate fluctuations affect trade policy through temporary trade barriers under the WTO compared to the GATT. We have already established that after inception of the WTO in 1995, weak domestic GDP growth, rising domestic unemployment, and exchange rate appreciations led to more products becoming subject to new temporary trade barriers. Before the establishment of the WTO, these relationships are not evident in the data. This suggests that the WTO period has impacted emerging economies by affecting the responsiveness of these import-restricting policies to real economic shocks. In fact, under the WTO, it also turns out that emerging-economy trade policy responsiveness to economic shocks is quite similar to that found for high-income countries (Knetter and Prusa, 2003; Bown and Crowley, 2013a).

Policy implications?

While it might be premature to draw definitive implications for policy from this early research, it is clear that understanding whether and how trade policy responds to economic shocks is increasingly important for the multilateral trading system.

On the one hand, there is potential cause for concern if it turns out that emerging economies? commitments to a more liberal trading regime are being unwound by the reapplication of import restrictions through temporary trade barriers (Bown and Tovar 2011). On the other hand, the application of temporary trade barriers in response to economic shocks is potentially consistent with theories of cooperative trade agreements that may require inclusion of ?safety valve? provisions to remain sustainable (Bagwell and Staiger 1990, Bown and Crowley 2013c).

If sufficiently limited in application, temporary trade barriers that respond to unexpected events may provide the necessary flexibility that allows an overarching liberal trade agreement to survive.

Chad P Bown is senior economist, Development Research Group, Trade and International Integration (DECTI), World Bank and Meredith Crowley is senior economist in the Economic Research Department, Federal Reserve Bank of Chicago.

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