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Currency Misalignments and Industry Demands for Trade Protection J. Lawrence Broz University of California, San Diego.

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Presentation on theme: "Currency Misalignments and Industry Demands for Trade Protection J. Lawrence Broz University of California, San Diego."— Presentation transcript:

1 Currency Misalignments and Industry Demands for Trade Protection J. Lawrence Broz University of California, San Diego

2 Motivation It is well known that protectionist activity is positively related to the level of the real exchange rate – 1980s – Ongoing U.S.-China controversy Less well known is that the protectionist response to currency misalignments varies by industry 2

3 Bills to protect the steel industry, by Congress ( ) 3

4 All protectionist trade bills,

5 Basic Argument Currency misalignments harm some industries but help others, and these effects are conditioned by the extent of pass- through This framework can be used to explain why some U.S. industries vigorously support legislation to impose trade sanctions during misalignments while other industries strongly oppose such laws 5

6 Industries harmed by misalignments Commodities and basic goods industries are more sensitive to misalignments than specialty product industries – Pass-through is high and price is the main discriminating factor for undifferentiated products – Thus, exchange rates directly affect competitiveness in these industries 6

7 Industries helped by misalignments Industries that import intermediate inputs (global supply chains) – Real appreciation lowers input costs Importers and Retailers – Real appreciation lowers import costs 7

8 Industries that oppose protection Export industries worried about retaliation – They fear being targeted in trade wars induced by misalignments Shipping industries – They fear lost revenue due to punitive trade sanctions 8

9 Some evidence Industry lobbying and congressional voting on The Currency Reform for Fair Trade Act of 2010 – Requires antidumping duties for the estimated amount of currency undervaluation; grants the Dept of Commerce authority to investigate undervaluation as a trade subsidy eligible to be offset by countervailing duties – Passed the House on Sep 29, 2010 but stalled in the Senate 9

10 Lobbying on The Currency Reform for Fair Trade Act 10 Mostly primary metals industries (high pass-through) Data from the Center for Responsive Politics

11 Lobby Contributions and House Voting 11 Difference is significant (t = 6.78)

12 Contributions and House Voting 12 Difference is significant (t = -3.20)

13 Conclusions Exchange rates induce trade policy responses but the effect varies across industries Pass-through is politically important since industries are more likely to demand trade protection if their competitiveness is harmed by misalignments (e.g., steel) Global sourcing means that misalignments have cross-cutting effects; hence, they induce less protectionism Opposition from importers, retailers, and shippers also helps counteract protectionism 13

14 Policy Implications Bills like H.R dont suggest a generalized increase in trade protection – Rather, we would see a rise in administered protection in certain industries, especially primary metals This limited response may be a good thing (politically efficient), in the spirit of WTO safeguards – Policymakers can avoid a full-on trade war by providing relief only to industries that demand it most 14


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