Exchange rates, protectionism and commercial policy: Alternative strategies for coordinating the G3 economies

Abstract

Persistent trade deficits and intermittent recession has revived interest in protectionist policies among policy makers on both sides of the Atlantic. The opportunity to do that via trade restrictions is provided by the Omnibus Trade Bill in the US and the 1992 Single Market Legislation in Europe. An alternative strategy is to maintain an undervalued exchange rate for the same objectives. This paper examines the relative effectiveness of those two strategies, and compares them to a policy of explicit cooperation between countries. The focus is on macroeconomic adjustment to disequilibria, rather than on the distributional effects normally discussed in the context of protectionism.