Trade Imbalances, Fiscal Imbalances and the Rise of Protectionism: Evidence from G20 Countries

We investigate the role of trade imbalances in the rise of protectionism on the period 2009-2020 among G20 countries. Bilateral trade imbalances are robust (with various sets of fixed effects) predictors of protectionist attacks. The evidence on the impact of multilateral trade imbalances is less robust. The role of trade imbalances in the rise of protectionism is confirmed when we instrument trade imbalances by unanticipated government spending shocks. Countries with more expansionary fiscal policies react to the ensuing trade imbalance by a more protectionist trade policy. The role of trade imbalances and fiscal policies in the rise of protectionism is economically significant: A one standard deviation increase in the bilateral trade deficit of a country leads to a 7% rise of protectionist attacks by this country.