Exchange Rates and Industry Demands for Trade Protection

Abstract

The recent confrontation between China and the United States over currency policy illustrates a broader phenomenon: exchange-rate misalignments tend to spill over into trade policy. While previous studies have shown that aggregate protectionist activity is positively related to the level of the real effective exchange rate, we explore this relationship at the industry level. We argue that several industry-specific characteristics determine the protectionist response to changes in the exchange rate, including the degree of exchange-rate pass-through, the level of import penetration, and the share of imported intermediate inputs in total industry inputs. We evaluate our conditional arguments by estimating a negative binomial model of industry-level anti-dumping petitions and find that the marginal effect of currency appreciation on this measure of the demand for trade protection is positive and significant only for industries with high pass-through. Therefore, exchange rates appear to induce demands for trade barriers only in industries where competitiveness is directly harmed by currency appreciation.

Keywords: exchange rates, trade protection, anti-dumping, exchange rate pass-through

JEL Classification: F1, F31