Crisis Protectionism: The Observed Trade Impact

This paper investigates how new discriminatory measures implemented since the start of the global financial crisis are affecting global trade flows. Newly available data on border measures and behind-the-border measures (for example, bailouts and subsidies) implemented through April 2010 are matched to monthly 4-digit bilateral trade data using a first-differenced gravity equation. The estimation strategy exploits within-product variation and utilizes extensive time-varying fixed effects and duad/tetrad ratio estimation to isolate as far as possible the impact of protectionist measures from that of other factors to estimate trade policy impacts. The estimates suggest that trade in country pairs subject to new border measures decreased by 5–8 percent relative to trade in the same product among pairs not subject to new measures. Identification of trade impacts of behind-the-border measures proves to be considerably more challenging, but, also for these measures, evidence points toward a negative impact, possibly of roughly the same magnitude. These results imply a decline in global trade of about 0.2 percent on account of crisis protectionism.