Publication: Smoke in the Water : The Use of Tariff Policy Flexibility in Crises
Loading...
Published
2009-09-01
ISSN
Date
2012-03-19
Editor(s)
Abstract
As the economic crisis deepens and widens, fears of a return to the protectionist spiral of the 1930s become more common. However, an important difference between the 1930s and today is the existence of the World Trade Organization and the legal limits it imposes on the protectionist responses members can pursue. The objective of this paper is threefold. First, to assess the extent to which applied tariff can legally be raised without violating tariff-bound obligations, and compare it with what is economically possible. Second, to examine what has been the protectionist response of individual countries when facing an economic crisis since the creation of the WTO. Finally, to predict how far the protectionist responses will go during the current crisis. Results suggest that the policy space left when looking at what is economically possible is indeed quite large. However, in the recent past very little of the available policy space has been used by countries suffering from an economic crisis. Our predictions for the current crisis are modest tariff hikes in the order of 8 percent.
Link to Data Set
Citation
“Foletti, Liliana; Fugazza, Marco; Nicita, Alessandro; Olarreaga, Marcelo. 2009. Smoke in the Water : The Use of Tariff Policy Flexibility in Crises. Policy Research working paper ; no. WPS 5050. © World Bank. http://hdl.handle.net/10986/4242 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Publication The Economic Value of Weather Forecasts: A Quantitative Systematic Literature Review(Washington, DC: World Bank, 2025-09-10)This study systematically reviews the literature that quantifies the economic benefits of weather observations and forecasts in four weather-dependent economic sectors: agriculture, energy, transport, and disaster-risk management. The review covers 175 peer-reviewed journal articles and 15 policy reports. Findings show that the literature is concentrated in high-income countries and most studies use theoretical models, followed by observational and then experimental research designs. Forecast horizons studied, meteorological variables and services, and monetization techniques vary markedly by sector. Estimated benefits even within specific subsectors span several orders of magnitude and broad uncertainty ranges. An econometric meta-analysis suggests that theoretical studies and studies in richer countries tend to report significantly larger values. Barriers that hinder value realization are identified on both the provider and user sides, with inadequate relevance, weak dissemination, and limited ability to act recurring across sectors. Policy reports rely heavily on back-of-the-envelope or recursive benefit-transfer estimates, rather than on the methods and results of the peer-reviewed literature, revealing a science-to-policy gap. These findings suggest substantial socioeconomic potential of hydrometeorological services around the world, but also knowledge gaps that require more valuation studies focusing on low- and middle-income countries, addressing provider- and user-side barriers and employing rigorous empirical valuation methods to complement and validate theoretical models.Publication It’s Not (Just) the Tariffs: Rethinking Non-Tariff Measures in a Fragmented Global Economy(Washington, DC: World Bank, 2025-10-22)As tariffs have declined, non-tariff measures (NTMs) have become central to trade policy, especially in high-income countries and regulated sectors like food and green technologies. Although NTMs may serve legitimate goals, they could also sort countries and firms into or out of markets based on compliance capacity and differences in product mix. Documenting recent advances in the estimation of ad valorem equivalents (AVEs), this paper uncovers new patterns of use and exposure of NTMs. High-income countries rely more heavily on NTMs relative to tariffs, while low- and middle-income countries face steeper AVEs on their exports. Firm-level evidence shows that NTMs disproportionately affect smaller firms, leading to market exit and concentration. Poorly designed NTMs can harm productivity and welfare, while coordinated, capacity-aware use can deliver inclusive outcomes. Policy design, transparency, and diagnostics must evolve to reflect the growing role—and risks—of NTMs in a fragmented global trade landscape.Publication Monitoring Global Aid Flows: A Novel Approach Using Large Language Models(Washington, DC: World Bank, 2025-11-04)Effective monitoring of development aid is the foundation for assessing the alignment of flows with their intended development objectives. Existing reporting systems, such as the Organisation for Economic Co-operation and Development’s Creditor Reporting System, provide standardized classification of aid activities but have limitations when it comes to capturing new areas like climate change, digitalization, and other cross-cutting themes. This paper proposes a bottom-up, unsupervised machine learning framework that leverages textual descriptions of aid projects to generate highly granular activity clusters. Using the 2021 Creditor Reporting System data set of nearly 400,000 records, the model produces 841 clusters, which are then grouped into 80 subsectors. These clusters reveal 36 emerging aid areas not tracked in the current Creditor Reporting System taxonomy, allow unpacking of “multi-sectoral” and “sector not specified” classifications, and enable estimation of flows to new themes, including World Bank Global Challenge Programs, International Development Association–20 Special Themes, and Cross-Cutting Issues. Validation against both Creditor Reporting System benchmarks and International Development Association commitment data demonstrates robustness. This approach illustrates how machine learning and the new advances in large language models can enhance the monitoring of global aid flows and inform future improvements in aid classification and reporting. It offers a useful tool that can support more responsive and evidence-based decision-making, helping to better align resources with evolving development priorities.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication The State of Global Services Trade Policies: Evidence from Recent Data(Washington, DC: World Bank, 2025-10-28)The economic environment for services trade has changed dramatically over the past 15 years, driven by rapid technological progress that has expanded the possibilities for exchanging services. How has trade policy responded to these changes? How do policy stances in a wide range of service sectors compare across economies? With its unprecedented global coverage, the Services Trade Policy Database and the associated Services Trade Restrictions Index, developed jointly by the World Bank and the World Trade Organization, help address these questions. This paper makes three principal contributions. First, it offers an in-depth discussion of the current state of services trade policies and their differences across 134 economies and 34 services subsectors. Second, the paper reveals how recent (2016–22) changes in policy stances have seen progressive liberalization by lower-income economies but stabilization or even slight policy reversals in high-income economies. This dynamic differs fundamentally from the trend that unfolded after the Great Recession over 2008–16. Third, the paper shows the implications of policy changes over the past six years on services trade costs, and it showcases how the Services Trade Policy Database’s regulatory information can inform trade negotiations, regulatory analysis, and policy making. Alongside these contributions, the paper documents updates to the Services Trade Policy Database’s economy and sector coverage and explains the latest methodological improvements made to the World Bank–World Trade Organization Services Trade Restrictions Index.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Politically Optimal Tariffs : An Application to Egypt(World Bank, Washington, DC, 2002-09)Egyptian economic history has been influenced by the import-substitution industrialization approach to development, dating back to Gamal Abdel Nasser's Pan-Arabic and socialist movement in the 1950s. Two major waves of liberalization have marked the government's efforts to rationalize and modernize the economy-the Infitah (opening) promoted by Anwar Sadat in the 1980s, and further trade and privatization efforts by Hosni Mubarak in the 1990s. Nonetheless, the extent of trade liberalization does not compare well with similar countries. Despite a decade of liberalization, the trade regime is characterized by deliberate and gradual reforms. By 1999 these reforms had led to average tariffs close to 30 percent, with high dispersion and escalation, well above those in comparable countries. provide a political economy analysis of the difficulties of liberalizing tariffs in Egypt in general, and in its specific industries. They present the theoretical and empirical models and discuss the results. The authors also explore the potential effects of the Euro-Med agreement for Egypt The authors provide a political economy analysis of the difficulties of liberalizing tariffs in Egypt in general, and in its specific industries. They present the theoretical and empirical models and discuss the results. The authors also explore the potential effects of the Euro-Med agreement for Egypt. The political economy analysis of the Egyptian tariff structure identifies two sets of highly protected sectors. Overprotected industries are defined as those with actual tariffs at least 25 percent higher than what is predicted by the political economy variables. The political determinants can be divided into two groups: the lobbying and counter-lobbying forces. First, the lobbying strength of specific capital in each sector is proxied by the degree of industry concentration, the labor-capital ratio, and the import penetration ratio. Second, counter-lobbying in factor or input markets is proxied by wage level, degree of processing in the industry, and degree of intra-industry trade. Using this methodology, the authors identify two sets of products: six products where tariff cuts will not be politically costly, and six where it will be politically costly, In both cases, lowering tariffs will improve resource allocation and efficiency in the industries involved. The prospects of a free trade area with Europe should also help reduce tariffs in sectors where a high share of production is exported or imported from Europe. If products are exported to Europe, the potential free access to the European market should more than compensate for any tariff reductions in the local market. On the other hand, if products are heavily imported from Europe, the preferential access for European exporters will tend to significantly increase their presence in the Egyptian market. This in turn will reduce the "protective" aspect of external tariffs in sectors with large import penetration as competition will be coming from Europe. The EU-Egypt agreement includes a lengthy (19 years) structure of tariff reduction. This structure will lead to increased effective rates of protection for the first eight years of its implementation, added economic distortions, and inefficient use of resources. The Egyptian authorities may want to consider speeding up the Euro-Med schedule of liberalization to mitigate an increase in effective rates of protection. Furthermore, special effort should be made to reduce external tariffs on semi-processed and processed goods to attenuate the expected negative effects of the rise in effective rates of protection. More generally, to prevent the high potential for trade diversion associated with Egypt's high tariffs, a simultaneous reduction in Egypt's external tariffs should accompany the EU-Egypt agreement.Publication Trade Policy Flexibilities and Turkey : Tariffs, Antidumping, Safeguards, and WTO Dispute Settlement(World Bank, Washington, DC, 2013-01)Trade policy commitments to lower import tariffs and to maintain tariffs at low levels entail short and long-run political-economic costs and benefits. Empirical work examining the relationship between such commitments and the exercise of trade policy flexibilities is still relatively nascent, especially for emerging economies. This paper provides a rich, empirically-based assessment of ways that Turkey exercised trade policy flexibilities during the global economic crisis of 2008-11. First, and despite multilateral and customs union commitments that might limit changes to applied tariffs, Turkey made changes to both its applied Most Favored Nation and preferential tariffs that cumulatively affect nearly 9 percent of manufacturing imports and 10 percent of import product lines. Second, Turkey's cumulative application of temporary trade barrier (TTB) policies -- antidumping, safeguards and countervailing duties -- are estimated to impact by 2011 an additional 4 percent of imports and 6 percent of product lines. Other surprising results on Turkey's use of flexibilities include: extending the duration of previously imposed antidumping and safeguards beyond expected removal dates, removing one TTB policy over a set of products and immediately reapplying a different TTB policy, covering lengthy upstream and downstream segments of important industries, and deepening discriminatory preference margins already inherent in existing preferential trade agreements.Publication Eliminating Excessive Tariffs on Exports of Least Developed Countries(Washington, DC: World Bank, 2002-01)Although average Organisation for Economic Co-operation and Development (OECD) tariffs on imports from the least developed countries are very low; tariffs above 15 percent have a disproportional effect on their exports. Products subject to tariff peaks tend to be heavily concentrated in agriculture and food products and labor intensive sectors, such as apparel and footwear. Although the least developed countries benefit from preferential access, preferences tend to be smallest for tariff peak products. A major exception is the European Union, so that the recent European initiative to grant full duty free and quota free access for the least developed countries will result in only a small increase in their exports of tariff peak items. However, as preferences are less significant in other major OECD countries, a more general emulation of the European Union initiative would increase the least developed countries total exports of peak products by US dollar 2.5 billion. Although almost half of this increase is at the expense of other developing country exports, this represents less than 0.05 percent of their total exports. This trade diversion can be avoided by reducing tariff peaks to a uniform 5 percent applied on a nondiscriminatory basis. However, such a reform would imply no gains for the least developed countries, suggesting that the globally welfare superior policy of nondiscriminatory elimination of tariff peaks should be complemented by greater direct assistance to poor countries.Publication Determinants of Trade Policy Responses to the 2008 Financial Crisis(2011-10-01)The collapse in trade and contraction of output that occurred during 2008-09 was comparable to, and in many countries more severe than, the Great Depression of 1930, but did not give rise to the rampant protectionism that followed the Great Crash. Theory suggests several hypotheses for why it was not in the interest of many firms to lobby for protection, including much greater macroeconomic "policy space" today, the rise of intra-industry trade (specialization in specific varieties), and the fragmentation of production across global value chains ("vertical" specialization and the associated growth of trade in intermediates). Institutions may also have played a role in limiting the extent of protectionist responses. World Trade Organization disciplines raise the cost of using trade policies for member countries and have proved to be a stable foundation for the open multilateral trading system that has been built over the last fifty years. This paper empirically examines the power of these and other theories to explain the observed pattern of trade policy responses to the 2008 crisis, using trade and protection data for seven large emerging market countries that have a history of active use of trade policy. Vertical specialization (global fragmentation) is found to be the most powerful economic factor determining trade policy responses.Publication Trade Policy, Trade Costs, and Developing Country Trade(Washington, DC: World Bank, 2008-12)This paper briefly reviews new indices of trade restrictiveness and trade facilitation that have been developed at the World Bank. The paper also compares the trade impact of different types of trade restrictions applied at the border with the effects of domestic policies that affect trade costs. Based on a gravity regression framework, the analysis suggests that tariffs and non-tariff measures continue to be a significant source of trade restrictiveness for low-income countries despite preferential access programs. This is because the value of trade preferences is quite limited: a new measure of the relative preference margin developed in the paper reveals that this is very low for most country-pairs. Most countries with very good (duty-free) access to a market generally have competitors that have the same degree of access. The empirical analysis suggests that measures to improve logistics performance and facilitate trade are likely to have the greatest positive effects in expanding developing country trade, increasing the trade impacts of lowering remaining border barriers by a factor of two or more.
Users also downloaded
Showing related downloaded files
Publication World Development Report 2006(Washington, DC, 2005)This year’s Word Development Report (WDR), the twenty-eighth, looks at the role of equity in the development process. It defines equity in terms of two basic principles. The first is equal opportunities: that a person’s chances in life should be determined by his or her talents and efforts, rather than by pre-determined circumstances such as race, gender, social or family background. The second principle is the avoidance of extreme deprivation in outcomes, particularly in health, education and consumption levels. This principle thus includes the objective of poverty reduction. The report’s main message is that, in the long run, the pursuit of equity and the pursuit of economic prosperity are complementary. In addition to detailed chapters exploring these and related issues, the Report contains selected data from the World Development Indicators 2005‹an appendix of economic and social data for over 200 countries. This Report offers practical insights for policymakers, executives, scholars, and all those with an interest in economic development.Publication World Development Report 2011(World Bank, 2011)The 2011 World development report looks across disciplines and experiences drawn from around the world to offer some ideas and practical recommendations on how to move beyond conflict and fragility and secure development. The key messages are important for all countries-low, middle, and high income-as well as for regional and global institutions: first, institutional legitimacy is the key to stability. When state institutions do not adequately protect citizens, guard against corruption, or provide access to justice; when markets do not provide job opportunities; or when communities have lost social cohesion-the likelihood of violent conflict increases. Second, investing in citizen security, justice, and jobs is essential to reducing violence. But there are major structural gaps in our collective capabilities to support these areas. Third, confronting this challenge effectively means that institutions need to change. International agencies and partners from other countries must adapt procedures so they can respond with agility and speed, a longer-term perspective, and greater staying power. Fourth, need to adopt a layered approach. Some problems can be addressed at the country level, but others need to be addressed at a regional level, such as developing markets that integrate insecure areas and pooling resources for building capacity Fifth, in adopting these approaches, need to be aware that the global landscape is changing. Regional institutions and middle income countries are playing a larger role. This means should pay more attention to south-south and south-north exchanges, and to the recent transition experiences of middle income countries.Publication Digital Africa(Washington, DC: World Bank, 2023-03-13)All African countries need better and more jobs for their growing populations. "Digital Africa: Technological Transformation for Jobs" shows that broader use of productivity-enhancing, digital technologies by enterprises and households is imperative to generate such jobs, including for lower-skilled people. At the same time, it can support not only countries’ short-term objective of postpandemic economic recovery but also their vision of economic transformation with more inclusive growth. These outcomes are not automatic, however. Mobile internet availability has increased throughout the continent in recent years, but Africa’s uptake gap is the highest in the world. Areas with at least 3G mobile internet service now cover 84 percent of Africa’s population, but only 22 percent uses such services. And the average African business lags in the use of smartphones and computers as well as more sophisticated digital technologies that catalyze further productivity gains. Two issues explain the usage gap: affordability of these new technologies and willingness to use them. For the 40 percent of Africans below the extreme poverty line, mobile data plans alone would cost one-third of their incomes—in addition to the price of access devices, apps, and electricity. Data plans for small- and medium-size businesses are also more expensive than in other regions. Moreover, shortcomings in the quality of internet services—and in the supply of attractive, skills-appropriate apps that promote entrepreneurship and raise earnings—dampen people’s willingness to use them. For those countries already using these technologies, the development payoffs are significant. New empirical studies for this report add to the rapidly growing evidence that mobile internet availability directly raises enterprise productivity, increases jobs, and reduces poverty throughout Africa. To realize these and other benefits more widely, Africa’s countries must implement complementary and mutually reinforcing policies to strengthen both consumers’ ability to pay and willingness to use digital technologies. These interventions must prioritize productive use to generate large numbers of inclusive jobs in a region poised to benefit from a massive, youthful workforce—one projected to become the world’s largest by the end of this century.Publication Classroom Assessment to Support Foundational Literacy(Washington, DC: World Bank, 2025-03-21)This document focuses primarily on how classroom assessment activities can measure students’ literacy skills as they progress along a learning trajectory towards reading fluently and with comprehension by the end of primary school grades. The document addresses considerations regarding the design and implementation of early grade reading classroom assessment, provides examples of assessment activities from a variety of countries and contexts, and discusses the importance of incorporating classroom assessment practices into teacher training and professional development opportunities for teachers. The structure of the document is as follows. The first section presents definitions and addresses basic questions on classroom assessment. Section 2 covers the intersection between assessment and early grade reading by discussing how learning assessment can measure early grade reading skills following the reading learning trajectory. Section 3 compares some of the most common early grade literacy assessment tools with respect to the early grade reading skills and developmental phases. Section 4 of the document addresses teacher training considerations in developing, scoring, and using early grade reading assessment. Additional issues in assessing reading skills in the classroom and using assessment results to improve teaching and learning are reviewed in section 5. Throughout the document, country cases are presented to demonstrate how assessment activities can be implemented in the classroom in different contexts.Publication Doing Business 2014 : Understanding Regulations for Small and Medium-Size Enterprises(Washington, DC: World Bank Group, 2013-10-28)Eleventh in a series of annual reports comparing business regulation in 185 economies, Doing Business 2014 measures regulations affecting 11 areas of everyday business activity: Starting a business, Dealing with construction permits, Getting electricity, Registering property, Getting credit, Protecting investors, Paying taxes, Trading across borders, Enforcing contracts, Closing a business, Employing workers. The report updates all indicators as of June 1, 2013, ranks economies on their overall “ease of doing business”, and analyzes reforms to business regulation – identifying which economies are strengthening their business environment the most. The Doing Business reports illustrate how reforms in business regulations are being used to analyze economic outcomes for domestic entrepreneurs and for the wider economy. Doing Business is a flagship product by the World Bank and IFC that garners worldwide attention on regulatory barriers to entrepreneurship. More than 60 economies use the Doing Business indicators to shape reform agendas and monitor improvements on the ground. In addition, the Doing Business data has generated over 870 articles in peer-reviewed academic journals since its inception.