International Finance Discussion Papers (IFDP)
May 1987
Protection and Retaliation: Changing the Rules of the Game
Catherine L. Mann
Abstract:
An examination of the macroeconomic, political, and institutional environment of the 1930s and the 1980s suggests a set of stylized facts associated with periods of trade tension and incidents of trade retaliation. Periods of macroeconomic stress precipitate changes in the conduct of and implementation of U.S. trade policy, which then can lead to escalating trade tension, protectionist measures, and perhaps retaliation. Macroeconomic stress, especially when linked to external events, decreases the political benefits of following a liberal trade policy and changes the economic consequences of following a particular trade strategy. As a result, it may be difficult for trading partners to predict the conduct of U.S. trade policy. Moreover, in reexamining its commitment to free trade, the United States may change its response to policies abroad. Finally, the United States may not only deviate from its established behavioral norms, but may also stray from the consensual international code of trade conduct.
These stylized relationships between macroeconomic environment and political and institutional pressures are applied to a simple game-theory paradigm. Changes in the environment and balance of political power change the elements of a payoff matrix. The policy implications of the model are that the United States should, subject to the constraints of a democracy, make clear both the direction of its trade policy and the magnitudes of any penalties. Much of the tit-for-tat trade retaliation observed in recent months may represent just such a communications effort.
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.