A macroeconomic research consultant at Capital Economics believes trade policy may be the only option left to raise the United States’ economic growth.
The economist believes the U.S needs to lower its trade deficit by forcing China to give up its unfair trade advantage by imposing tariffs. The idea is that China’s undervalued yuan is allowing the country to sell goods, thus gaining a large share of the global purchasing power. Because China also grossly under-spends, it takes away demand from the global and US economy.
By imposing tariffs, the U.S. will appreciate the yuan allowing the U.S. to sell more goods domestically and to the rest of the world. The economist believes this will raise unemployment in the U.S. and shift purchasing power back to the U.S.
I can’t help but question this technique. We learned that by restricting imports our net exports will remain constant while our exchange rate appreciates. I don’t believe imposing these restrictions will lower our trade deficit as this economist believes.
I think your concerns surrounding protectionist policies are well-founded. By cutting down imports for instance, they will increase the demand for net exports and raise the real exchange rate but the equilibrium level of net exports will be unaffected. The prices of domestically-produced goods however will increase, leading to a drop in exports. Those policies will also act as a barrier for international trade, limiting the diversity and quality of products on the domestic market. However, I wonder if there are other policies that will not be so disadvantageous.
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