Rational Tariff Cycles: Economic Uncertainty and Trade Policy in the Long Run

• In Event: Improving Trade Theory: Innovations in Measurement and Empirical Strategy

Abstract

While it is commonplace to assume that, ceteris paribus, uncertainty makes people averse to change, I show here that in the context of trade, uncertainty can rather induce fundamental shifts in trade policy. Uncertainty encourages individuals to expect they can adapt to extreme price changes after they have occurred, attenuating the costs of adverse price changes and potentiating favorable shifts in price. In the protectionist status quo, uncertainty about free trade prices will draw individuals who gain from protection to favor free trade, and vice versa, uncertainty about autarkic prices can draw winners of a free trade status quo to advocate protection. Trade policy thus has a heartbeat of its own: it should be inherently, and rationally, cyclical. I illustrate these dynamics with a measure of protectionist bias using congressional speech data.

Author

• In Young Park, Princeton University