Economic Crises and Trade Policy Competition
86 Pages Posted: 9 Jul 2015
Date Written: July 8, 2015
How do crises affect trade policy? We reconcile starkly diverging accounts in the literature by showing that economic adversity generates endogenous incentives not only for protection, but also for liberalization. We first develop formally the mechanisms by which two features of shocks - intensity and duration - influence the resources and political strategies of distressed firms. Our central insight is that policy adjustments to resuscitate afflicted industries typically generate "knock-on" effects on the profitability and political maneuverings of other firms in the economy. We incorporate these countervailing pressures in our analysis of trade policy competition. In the wake of crises, protection initially increases when impacted firms lobby for assistance, but then decreases as industries run low on resources to expend on lobbying and as firms in other industries mobilize to counter-lobby. We test our theoretical predictions using sub-national and cross-national data and present real-world illustrations to highlight the mechanisms driving our results.
Keywords: economic crises, trade policy, lobbying, business-state relations
JEL Classification: F1
Suggested Citation: Suggested Citation