Institutions, Information, and Trade Policy in Times of Crisis

Baccini, Leonardo and Kim, Soo Yeon Institutions, Information, and Trade Policy in Times of Crisis. Working Paper # /2011 (Unpublished)

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Abstract

The paper examines the role of international institutions in preventing the rise of protectionism in times of times of crisis. Economic crisis exacerbates uncertainty in the conduct of commercial relations and thus makes it more likely for countries to resort to "beggar-thy-neighbor" trade policies. The historical record of the Great Depression supports this argument, where global trade suffered a downward spiral as governments pursued protectionist trade policies as a response to domestic pressures. This paper argues that the current era of globalization is distinguishable from its earlier counterparts by the presence of an extensive network of international institutions, which serve as conveyors of information that help to mitigate the information problem that prevails in prisoner‘s dilemma settings. Specifically, international institutions such as the WTO, preferential trade agreements (PTAs) and other international economic organizations increase the flow of information among countries. In doing so, they alleviate coordination problems as well as facilitate the detection of violations in commitments to maintaining a liberal trade regime. We suggest that this mechanism may explain why the current crisis is not replicating the pattern of the Great Depression. Moreover, we explore the combined effect of membership in international organization and political variables, the latter including democracy, veto players, partisanship of government, and government effectiveness. We test this argument using a newly-compiled dataset of trade policies during the current economic crisis and membership in international organizations. The paper finds strong support for the informational role of international institutions as a key factor preventing the rise of protectionism in times of crisis. Conversely, there is mixed evidence that the combining effect of international organizations and domestic political variables matters in explaining protectionism during this crisis.

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