time. A trade-volume shock thus a¤ects the incentive to cheat in the current period but has no direct impact on the discounted future value of cooperation. Bagwell and Staiger (2003) extend the model to allow for both iid shocks to the trade-volume level and stochastic but persistent trends in the growth rate for trade volume.<sup>62</sup> At any given point in time, governments observe the current shock to the trade-volume level and observe as well whether the trading relationship is in a fastor slow-growth phase, where the relationship moves between the two phases according to a Markov process. They ...nd that the most-cooperative trade agreement for governments with moderate patience is countercyclical: all else equal, the most-cooperative tari¤s are lower in a fast-growth phase. The key intuition is that governments have more to lose from initiating a trade war in a (persistent) fast-growth phase; as a consequence, they can then withstand that heightened incentive to cheat that a lower cooperative tari¤ implies.<sup>63</sup> Bown and Crowley (2013b) provide an empirical investigation of the macroeconomic determinants of time-varying trade policy. Using quarterly data for the US, EU, Australia, Canada and South Korea, they ...nd evidence of a countercyclical trade policy response in the pre-Great Recession period (namely, the ...rst quarter of 1988 through the third quarter of 2008).<sup>64</sup> Their ...ndings are broadly consistent with the theoretical predictions in Bagwell and Staiger (2003) as well as those in Crowley’s (2011) reciprocal dumping model, which predicts an increase in import restrictions in response to macroeconomic weakness abroad. A di¤erent perspective on safeguards is o¤ered by Sykes (1991, 2003). He observes that instruments of special protection are often applied to assist declining domestic industries. Firms in such an industry retain a large share of the bene...ts of price-increasing protection, since temporary protection is unlikely to encourage entry in a declining industry. Thus, ...rms in a declining industry may lobby hard for protection and, therefore, ...gure prominently in the domestic government’s welfare function. Foreign exporters are naturally harmed by the domestic tari¤; however, if the foreign export industry is growing, then they may complain little about facing protection, since their pro...ts eventually would be lost to entry anyhow. These ...rms therefore may not ...gure prominently in the foreign government’s welfare function. Thus, governments in an ex ante state may be attracted to a safeguard rule for declining industries, since the welfare bene...t to the government that uses the safeguard may exceed the welfare cost to the government whose exporters face the safeguard.

Implications and new directions Our survey highlights that tari¤ caps and binding overhang occur in an optimal trade agreement when governments are privately informed about their preferences and contingent transfers are infeasible. With this foundation in place, we then consider three complementary theories for the use of special instruments of protection. First, when governments experience privately observed preference shocks, upward ‡exibility might promote further

> 62 Hochman and Segev (2010) extend the Bagwell-Staiger (1990) model in a di¤erent direction by allowing that governments may imperfectly observe the trade-volume shock before applying tari¤s. Another interesting extension is considered by Tabakis (2010), who examines the use of special protection when countries are transitioning into preferential trading agreements.

> 63 This work builds on methods used by Bagwell and Staiger (1997c) to analyze collusion over the business cycle.

> 64 Bown and Crowley (2014) provide additional empirical support from a sample of 13 emerging economies and use of annual data covering the period 1995-2010.

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