While world leaders are convening in South Korea for the G-20 meetings, scholars of international political economy are gathering at Harvard University for the fifth annual IPES Conference. IPES has become the place where cutting edge working papers on international political economy are presented. Among the many interesting papers, there are at least two that speak directly to the issue of the day at the G-20: the link between exchange rate regimes and protectionism. (If you want to get up to speed, this rap does a pretty good job outlining the issues).
First, Mark Copelovitch and Jon Pevehouse of the University of Wisconsin show evidence that fluctuations in exchange rates are strongly correlated with increased filings of WTO trade disputes. Most notably, countries with depreciating currencies and inflexible exchange rate regimes are much more likely to have disputes filed against them than are other states. There are multiple plausible reasons for why this might be so but the important bottom line is that disputes over exchange rates can and have spilled over into trade disputes.
Second, Lawrence Broz of UC San Diego has a new working paper that shows that exchange-rate misalignments tend to increase trade protectionism in the United States. Broz not only finds evidence that anti-dumping petitions and trade legislation respond to real exchange rates but he also reports more disaggregate evidence. Industries that are more affected by drops in the real exchange rates lobby harder for protectionism when the exchange rate becomes more unfavorable. Perhaps most notably, Broz shows that:
“lobbying and congressional voting patterns on H.R. 2378, The Currency Reform for Fair Trade Act, which would impose trade barriers on nations with misaligned currencies, reflects the differential impact of exchange rates across industries: exporters and import-competing industries explicitly lobbied for the legislation while non-traded good producers, importers, and users of imported intermediate products lobbied against it. I also show that campaign contributions from supporting industries have a large and significant effect on the likelihood that a member of Congress voted “yes” on the bill.”
These are all works in progress, so the results should be treated as preliminary. Yet, they have some interesting policy implications. For example, Broz stresses that “exchange rates tend to provoke targeted trade policy responses because exchange rates have different effects on different industries.” Thus, while we can expect some increased protectionism against goods from China, it will likely be limited to the industries directly affected (especially the metals processing industry). Similarly, the WTO provides an outlet where individual trade disputes can be litigated before they escalate into an all-out trade war over all manufactured goods.