NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The 2008 Financial Crisis and the Lack of Retaliatory Trade Intervention

Chunding Li, John Whalley

NBER Working Paper No. 21853
Issued in January 2016
NBER Program(s):   ITI

The 2008 financial crisis did not precipitate global retaliatory trade intervention, in seeming contrast to the Great Depression in 1930s. This paper discusses the influence of model structure in optimal tariff (OT) calculations in explaining this puzzle. We emphasize how earlier literature reports high optimal tariffs in numerical calculation (of a hundred of percent) but only uses simple trade models. We use numerical general equilibrium calibration and simulation methodology to calculate optimal tariffs both with and without retaliation in a series of observationally equivalent models, and explore the influence of model structures on optimal tariff levels. We gradually add more realistic features into basic general equilibrium model, and show sharply decline optimal tariffs, which suggests that trade retaliation incentives effectively disappear with the deepening of globalization in 2008 compared to 1930.

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Document Object Identifier (DOI): 10.3386/w21853

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