'Temporary' trade taxes can end up killing a country's ability to compete forever because companies stop bothering to innovate.
March 20, 2026
Original Paper
Tipping into Protectionism: Tariff Shocks and the Fragility of Free Trade
SSRN · 6309599
The Takeaway
We often assume trade protectionism can be 'undone' once an economy stabilizes, but this model shows that even short-lived tariffs can trap a country in a high-tariff loop. By reducing the incentive for local firms to innovate, the temporary shield makes them so uncompetitive that they can never survive a return to open markets.
From the abstract
This paper develops a dynamic political-economy model of trade-policy hysteresis. Tariffs affect competitiveness by shaping firms' innovation incentives, while policymakers are myopic and maximize contemporaneous welfare. The interaction of myopic policy choice and slow-moving competitiveness generates two stable steady states: a low-tariff, high-competitiveness regime and a high-tariff, low-competitiveness regime, separated by a critical competitiveness threshold. Myopia alone does not imply pr