Currency Misalignments and Industry Demands for Trade Protection
43 Pages Posted: 14 Aug 2014
Date Written: 2014
It is well known that currency misalignments lead governments to raise trade barriers. Less well known is that the protectionist response to currency misalignments varies by industry Industries with high exchange rate “pass through” (where exchange-rate changes are more fully transmitted to product prices) are more likely to be harmed by misalignments than industries with low pass-through. Similarly, industries that rely on imported intermediate inputs via global supply chains are less likely to be harmed by misalignments than industries that source domestically. I evaluate these arguments with evidence from recent U.S. legislation that would impose trade barriers on nations with misaligned currencies. I find support for the claim that exchange rates have a differential impact across industries: high pass-through industries explicitly lobbied for the legislation while industries dependent on global supply chains lobbied against it. I also show that campaign contributions from supporting (opposing) industries have meaningful effects on the likelihood that a member of Congress voted yes (no) on the legislation. Therefore, exchange rates appear to induce demands for trade barriers only in industries where competitiveness is unambiguously harmed by misalignments.
Keywords: exchange rates, trade protectionism, currency misalignments
JEL Classification: F1, F3
Suggested Citation: Suggested Citation