Currency Misalignments and Industry Demands for Trade Protection

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

3. Bills to protect the steel industry, by Congress (1979-2010)

4. All protectionist trade bills, 1979-2010

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

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

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

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

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

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

11. Lobby Contributions and House Voting Difference issignificant (t = 6.78)

12. Contributions and House Voting 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

14. Policy Implications • Bills like H.R. 2378 don’t 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