Currency Misalignments and Industry Demands for Trade Protection

Abstract

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. I argue that industries with high exchange rate pass-through (where exchange-rate changes are more fully transmitted to product prices) are more likely to seek trade protection during misalignments than industries with low pass-through. I also argue that industries with global supply chains are less likely to seek trade protection during misalignments than industries that source inputs domestically. I evaluate these arguments with evidence from a 2010 congressional proposal to impose trade barriers on nations like China that are perceived to engage in currency manipulation. I find support for the claim that exchange rates have differential affects across industries: high pass-through industries explicitly supported this proposal while industries dependent on global supply chains took positions against it. I also show that the location of supporting and opposing industries across congressional districts correlates with two types of congressional behaviors: cosponsoring and roll-call voting on the 2010 currency proposal. Exchange rates appear to induce pressures for targeted trade barriers only in industries where competitiveness is unambiguously harmed by misalignments.