Good Times and Bad Times, with Endogenous Trade Policy Responses

Abstract

Globalisation is associated with long periods of sustained economic growth and credit expansion, whereas major recessions tend to lead to falling trade and protectionism. I investigate this, using a model where an important component of trade is search by rms trying out new trade partners. To model this, I set up a schematic model of upstream-downstream matching between rms, where match quality determines prots. Prior to globalisation, Northern upstream and downstream rms work together, to avoid trade costs. As trade is liberalised, new North-South matches begin to develop, but at rst these are footloose (since many are experimental in nature), and can be driven out rapidly if there is a demand crisis. The presence of a highly elastic, searching element of trade, during periods of global liberalisation and fast growth means that countries cannot gain terms-of-trade advantage from protection. By contrast, if a prolonged recession drives out searching rms, the remaining trade is relatively priceinelastic, and beggar-thy-neighbour taris become attractive. Such observations are consistent with the rapid and damaging switch to protectionism after the 1929 Stock Market Crash, and emphasise the need for continued multilateral commitment to trade liberalisation, in the aftermath of the 2008 Great Trade Recession.

The Brexit policy shock: Were UK services exports affected, and when?

“…Alternatively, Sedlacek & Sterk (2017) link expansion of the intensive margin of sales to cumulative marketing expenditure: it is highly likely that this is something which can be postponed, if the firm is faced with an uncertain future barrier. Secondly, while simpler models of firm exit might predict that exit will only happen when a negative trade event actually occurs (rather than in advance), this is not the case where trading involves renewing contracts or renewing search (Edwards 2017), in which case withdrawal of firms may well be spread out over the period before the final policy decision, as firms come to the point where they need to renew ties. Finally, if firms' search process consists of a series of trial and error contracts, then those who have not yet found good matches would be expected to withdraw pending a negative anticipated shock.…”