Growth, Real Exchange Rates and Trade Protectionism since the Financial Crisis

Date01 November 2016
AuthorGeorgios Georgiadis,Johannes Gräb
DOIhttp://doi.org/10.1111/roie.12247
Published date01 November 2016
Growth, Real Exchange Rates and Trade
Protectionism since the Financial Crisis
Georgios Georgiadis and Johannes Gr
ab*
Abstract
Existing evidence suggests that protectionist activity since the financial crisis has been muted, raising the
question whether the historically well-documented relationship between growth, real exchange rates and
trade protectionismhas broken down. We use a novel and comprehensive dataset that stretches beyond the
traditionally considered tariff and trade defense measures to study the responsiveness of trade policies to
business cycles andprice competitiveness in the time periodsince the financial crisis. We find that the spec-
ter of protectionism has not been banished. Countries continue to pursue more trade-restrictive policies
when they experience recessions and/or when their competitiveness deteriorates. Our results suggest that
the global economy continues to be exposed to the risk of a creeping return of trade protectionism.
1. Introduction
The eruption of the financial crisis was followed by a sharp global economic downturn
and a collapse in world trade. Interestingly, existing evidence suggests that the protec-
tionist response to this slowdown in global economic activity has been remarkably
modest (Rodrik, 2009; Bown, 2011a). The restraint in global protectionist activity
appears particularly benign in light of firmly established evidence for the decades prior
to the financial crisis documenting that countries typically adopted trade-restrictive
policies when they experienced recessions and/or losses in competitiveness through an
appreciation of the real exchange rate. Some evidence also suggests that countries
erected trade barriers when their trading partners experienced weaker growth.
1
The
combination of a sharp global economic downturn and the sluggish recovery from the
financial crisis on the one hand and the muted protectionist activity on the other hand
thus raise the question whether the relationship between growth, real exchange rates
and trade protectionism has broken down more recently, or whether the global econ-
omy continues to be exposed to the risk of a creeping return of trade protectionism.
In order to shed light on this question, we use novel data released by Global Trade
Alert (GTA) which cover a wide array of trade policies, ranging from traditional trade
policies such as tariff or trade defense to non-traditional policies with discriminatory
potential—so-called “murky” measures—implemented by 160 countries since GTA’s
inception in 2008. We estimate bilateral regressions of the number of newly imple-
mented trade-restrictive measures on the real bilateral exchange rate, implementing
country’s and affected trading partner’s real gross domestic product (GDP) growth for
*Gr
ab (corresponding author) and Georgiadis: European Central Bank, 60311 Frankfurt am Main, Ger-
many. Tel.: 149-69-1344-5120; E-mail: johannes.graeb@ecb.int. This paper should not be reported as rep-
resenting the views of the European Central Bank (ECB). The views expressed are those of the authors
and do not necessarily reflect those of the ECB. We would like to thank Johannes Fritz and Sebastian
Kripfganz, seminar and conference participants at the ECB, the 14th Conference on International Eco-
nomics in Palma de Mallorca and the Mainz Workshop in Trade and Macroeconomics as well as two
anonymous referees and the editor for helpful comments and suggestions.
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C2016 John Wiley & Sons Ltd
Review of International Economics, 24(5), 1050–1080, 2016
DOI:10.1111/roie.12247
the time period 2009q1–2015q2. We find that in the period since the financial crisis—
despite the overall limited recourse to trade protectionism—countries did adopt trade-
restrictive policies when they experienced weaker domestic growth and losses in com-
petitiveness through an appreciation of the real exchange rate. Moreover, we find
some evidence for retaliation, in particular for G20 advanced economies. Policy mak-
ers implemented more trade-restrictive measures when their trading partners experi-
enced declines in their GDP growth. In addition, we find that trade policies of G20
advanced economies (AEs) responded more strongly to changes in domestic growth
relative to G20 emerging market economies (EMEs), while G20 EMEs reacted more
strongly to losses in competitiveness. Finally, we find that G20 trade policies vis-
a-vis
other G20 economies were less responsive to losses in competitiveness and declines in
domestic GDP growth than G20 trade policies vis-
a-vis non-G20 economies.
The innovations to the literature our paper provides are twofold. First, our paper is
the first to provide robust empirical evidence showing that despite the overall limited
recourse to trade protectionism in the period since the financial crisis, countries did
systematically respond to recessions and losses in competitiveness by adopting trade-
restrictive policies. Second, in establishing this evidence we consider dimensions of
trade policy that stretch beyond traditional trade policy measures and that have so far
not been considered in this literature. Importantly, the trade policy data we consider
include “murky” measures, that is, state measures that at least potentially abuse policy
space granted in international trade agreements or that are beyond the latter’s reach
in order to discriminate against foreign producers. Examples for “murky” measures
include health and safety regulations or buy-local clauses in stimulus and bail-out
packages. Our results suggest that the relationship between growth, real exchange
rates and trade protectionism for the time period since the financial crisis holds both
for traditional and non-traditional “murky” trade policy measures.
The rest of this paper is organized as follows. We first review the existing empirical
literature on the relationship between growth, real exchange rates and trade protec-
tionism as well as on the protectionist response to the financial crisis in section 2. In
section 3 we discuss the theoretical channels that may give rise to an empirical rela-
tionship between growth, real exchange rates and trade protectionism and that moti-
vate our regression specification. In section 4, we present our empirical model and we
describe our data on trade policies and macroeconomic variables. Section 5 presents
our core results. Extensive robustness checks are discussed in section 6. Finally, section
7 concludes.
2. Related Literature
Our paper is related to two strands of the literature. First, our paper contributes to the
empirical literature on the relationship between growth, real exchange rates and trade
protectionism. A large literature puts forth evidence documenting that there existed a
close relationship between growth, real exchange rates and trade protectionism before
the financial crisis. For example, for the time period from 1980 to 1998, Knetter and
Prusa (2003) detect a negative relationship between declines in domestic growth and
losses in competitiveness through an appreciation of the real exchange rate on the one
hand and anti-dumping (AD) filings for the USA, the EU, Australia and Canada
against their main trading partners on the other hand. Using aggregate instead of bilat-
eral data in order to extend the time-series coverage back to 1947, Irwin (2005) con-
firms the results of Knetter and Prusa (2003) for the USA. Bown (2008) analyzes data
on 28 industries in Argentina, Brazil, Colombia, India, Indonesia, Mexico, Peru,
GROWTH, EXCHANGE RATES AND PROTECTIONISM 1051
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C2016 John Wiley & Sons Ltd

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