Despite fears of protectionism rising in the face of economic difficulties, a recent study from the University of California School of Global Policy and Strategy reminds us that trade actually helps to boost resiliency during such crises.

The research shows that international trade agreements provided American firms with insurance against any threats posed by global trade wars during the financial crisis in 2008.

“There is ample evidence that protectionist policies such as trade tariffs are a common response to economic and political shocks, but trade agreements tie the hands of policymakers that would otherwise raise barriers,” the researchers explain. “By making policies more permanent, they also increase the value of firms’ investments in new export markets, particularly during economic downturns.”

Economic insurance

The analysis reveals that American exports fell by 22% between 2008 and 2009, but that exports to all markets were not impacted in the same way. For instance, exports to countries where a preferential trade agreement was in place not only fell by less but also recovered more quickly. Indeed, the 2008 shock was around three times greater for markets where no trade agreement existed.

“As it is looking like we could have another global recession within in the next 12 to 18 months, we hope our research can provide motive for governments to address economic uncertainty with trade agreements that can make trade relationships more resilient to downturns and speed up recoveries,” the researchers explain.

Such trade agreements are especially valuable to export-dependent industries, such as capital goods and the automobile sector. The data also shows that trade agreements have a considerable impact on business investment.

The researchers conclude that the insurance value of trade agreements contributes to their larger effects on trade and should be considered when deciding to enter or exit such agreements.