This paper investigates how trade flows are being affected by new discriminatory measures implemented during the global financial crisis. We match data on behind-the-border measures (e.g., bailouts and subsidies) and border measures implemented through April 2010 to monthly HS 4-digit bilateral trade data. Our estimation strategy relies on a first-differenced gravity equation and time-varying fixed effects to disentangle the impact of new discriminatory measures. Trade in exporter-importer pairs subject to new measures decreased by 5 to 8 percent relative to trade in the same product among pairs not subject to new measures. These product-level results imply global trade declines at the aggregate level of about 0.2 percent, or $30-35 billion a year. These aggregate figures would be higher, if one third of measures had not been excluded due to incomplete data. The paper then goes on to dissect protectionism’s trade impact by disaggregating measures by type, advanced/developing countries, regions, sectors, and time. Behind-the-border measures are found to have been more harmful than border measures at the product level. Among border measures, impacts tend to be higher for less transparent measures. Advanced countries are found to be responsible for 2/3 of the trade decline due to crisis protectionism, but their exports also absorbed 2/3 of this decline. When breaking down measures in a time dimension, we find that those taken in the first nine months after the Lehman collapse were most harmful and likely continue to constitute a drag on trade.

The global financial crisis of 2008/9 is the Great Depression of the 21st century. For many though, the similarities stop at the Wall Street Crash as the current generation of policymakers have acted quickly to avoid the mistakes of the past. Yet the global crisis has made room for mistakes all of its own. While governments have apparently kept to their word on refraining from protectionist measures in the style of 1930s tariffs, there has been a disturbing rise in "murky protectionism." Seemingly benign, these crisis-linked policies are twisted to favour domestic firms, workers and investors. This book, first published as an eBook on VoxEU.org in March 2009, brings together leading trade policy practitioners and experts - including Australian Trade Minister Simon Crean and former Mexican President Ernesto Zedillo. Initially its aim was to advise policymakers heading in to the G20 meeting in London, but since the threat of murky protectionism persists, so too do their warnings.

The purpose of this book is to examine the various ways in which the existing manifestations of openness, including binding international accords, have constrained or enhanced the options available to national policymakers during the crisis and influenced the degree, and potentially even the effectiveness, of cross-border cooperation. By examining state responses during the crisis in a number of distinct policy domains, this approach may shed light on potential complementarities and tensions as governments seek to tackle sharp national recessions while being mindful of the growing role that the international dimension has played in influencing national economies in an era of globalization. In principle, such an examination may reveal that some permutations of national policy choices and international (trade and other) obligations offer greater potential than others, in turn providing information on the possible scope for both domestic reforms and the global trade architecture.

The pace of trade reforms waned from the mid-2000s as protectionist sentiment began to increase. With the onset of the global financial crisis, reform progress not only halted but began to reverse. As we show in this note, new trade restrictions have had—in the limited products they targeted—a strong negative impact on trade. The aggregate impact of new restrictions is modest, at about 0.25 percent of global trade, as most countries have resisted a widespread resort to protectionism. Looking ahead, however, in 2010 sustained high unemployment, uneven growth, and an unwinding of government stimulus measures suggest that protectionist pressures may rise. Gaps in World Trade Organization (WTO) commitments leave ample scope to further restrict trade, so unless all countries vigorously resist protectionism this could threaten the economic recovery and drag down future growth. Continuing and further enhancing the monitoring of all protectionist measures and maintaining the high-level political awareness of the associated macroeconomic risks will help. But the surest way to avoid such a downside scenario is to tighten multilateral trade commitments by completing the WTO Doha Round. This can be viewed as a key part of the exit strategy from the global economic crisis.

The extreme protectionism that contributed to a collapse of world trade in the 1930s is examined in light of the recent economic crisis. The recent economic crisis—with the plunge in the stock market, numerous bank failures and widespread financial distress, declining output and rising unemployment—has been reminiscent of the Great Depression. The Depression of the 1930s was marked by the spread of protectionist trade policies, which contributed to a collapse in world trade. Although policymakers today claim that they will resist the protectionist temptation, recessions are breeding grounds for economic nationalism, and countries may yet consider imposing higher trade barriers. In Trade Policy Disaster, Douglas Irwin examines what we know about trade policy during the traumatic decade of the 1930s and considers what we can learn from the policy missteps of the time. Irwin argues that the extreme protectionism of the 1930s emerged as a consequence of policymakers' reluctance to abandon the gold standard and allow their currencies to depreciate. By ruling out exchange rate changes as an adjustment mechanism, policymakers turned instead to higher tariffs and other means of restricting imports. He offers a clear and concise exposition of such topics as the effect of higher trade barriers on the implosion of world trade; the impact of the Smoot-Hawley tariff of 1930; the reasons some countries adopted draconian trade restrictions (including exchange controls and import quotas) but others did not; the effect of preferential trade arrangements and bilateral clearing agreements on the multilateral system of world trade; and lessons for avoiding future trade wars.