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Smoke in the (Tariff) Water


  • We are grateful to Chad Bown, Simon Evenett, Bernard Hoekman, Patrick Messerlin, Håkan Nordström and an anonymous referee and participants at the CEPR–World Bank Conference on State Measures Taken during the Crisis for very helpful suggestions on an earlier version. We would also like to thank the World Bank and the Swiss Network for International Studies for their financial support. We are obviously also indebted to the British rock band Deep Purple for their great music and the title of their song: ‘Smoke on the Water’. Nevertheless, the views expressed here are those of the authors and do not necessarily reflect those of Deep Purple, or the institutions with which the authors are affiliated.


As the economic crisis deepened and widened, 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 first objective of this paper is to assess the extent to which applied tariffs can be legally raised without violating bound tariff obligations and compare it with what is economically feasible. The second objective is the examination of whether individual countries have taken advantage of these legal tariff hikes as protectionist responses during economic crises, after the creation of the WTO. Results suggest that the policy space left when looking at what is economically possible is indeed quite large. However, in the recent past little of the available policy space has been used by countries suffering from an economic crisis.