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Trade Protectionism: A Balancing Act
Trade Protectionism: A Balancing Act
Balancing Act
The more troublous the times, the worse does a laissez faire
system work- 1923, John Maynard Keynes
• J M Keynes was a classical economist who believed that taxes should be low, regulatory
interference minimal and that economic growth could be maximised only under a
regime of free trade.
This was until Great Britain went spiralling down in recession between WW I and WW II
• Due to Britain’s high fixed exchange rate (relative to gold)
• Makes sense to argue that current economic problems in US partly related to an exchange value-
which is too high for the US producers to be competitive.
In today’s economic sphere, can something like
free trade actually exist?
• In an era where price of stocks, interest rates and currencies are managed by central banks: ‘free
trade’ simply cannot exist.
Current Account + Capital Account = 0
• For the RoW, in the case of current account surplus- its net national
savings are positive- and these excess savings are invested in assets
from other countries like US Treasuries, African farmland etc.
Adding and comparing these components,
• Exports= Imports
• World Savings = 0
But why the imbalance?
Since 1971, the fiat US dollar has become the world’s reserve currency.
US’s privilege of issuing this currency has allowed it to run a persistent trade deficit to
offset capital inflows
95% of currency-trading transactions are capital related rather than trade related-
Richard Koo, CEO, Nomura Research Institute
Thus, we end up with a large current account deficit and an ever-worsening gap as capital inflows
exceed capital outflows.
• Currency devaluation- to boost exports- domestic employment-a step similar to what Britain had
to take in 1930s.
• Bilateral Trade Agreements-ineffective-as structural imbalances are global rather than bilateral- a
hassle to pass through the US Senate
• Border Adjustment Tax- easier to pass-would reduce consumption as a % of GDP- forcing upward
trends in national savings-thereby, reducing trade deficit
• Buying foreign government debt- a capital outflow for US- apart from improving the current
account deficit- would also lower exchange rate- leading to US exports being priced far more
competitively-further, this would not require Congressional approval-President will get to appoint
4/7 people in Federal Reserve Open Mkt Committee (FOMC)