Changes in Trade-Policy Regimes

Abstract

One of the curiosities of trade policy regimes is that policies spawned in response to large but temporary external shocks seem to persist long after the shock has subsided. Thus protection frequently appears in an industry in response to sudden, adverse terms of trade shocks and then lives on even after relative prices have returned to “normal.” Political scientists attribute this to an increased commonality of interests during cyclical troughs which may facilitate overcoming fixed costs of putting a lobby organization in place. The lobby, it must be argued, is then maintained even when “normality” returns to the markets so long as the maintenance costs are less than the perceived benefits secured through the political process. Similarly, free trade is commonly imposed on just the same industries when they experience large favorable terms of trade shocks and then this regime seems to displace the protectionist one when prices return to normal. This is the clear impression from recent studies such as Hufbauer et. al. (1986) wherein industries in the U.S., such as ball bearings, simply do not petition to retain special protection when prices are especially firm even though they lose their protected status for the future. What seems curious is not so much that large shocks engender regime changes, but that the regime thus enfranchised then seems to win the day after the shock has disappeared and to persist in the very same economic environment that had previously supported an alternative policy regime.