Winners and Losers in the Asia-Pacific
Edited by Noel Gaston and Ahmed M. Khalid
Chapter 7: Trade Policy, Exchange Rate Adjustment and Unemployment
7. Trade policy, exchange rate adjustment and unemployment Yoshiyasu Ono* INTRODUCTION When a country has unemployment, the government often attributes it to massive imports from foreign countries. It then imposes trade restrictions so that domestic firms can expand their market share and increase employment. A famous example is the tariff war during the Great Depression that was triggered by the Smoot–Hawley Tariff Act.1 Although most economists agree that such policies would harm the world economy, they are still occasionally adopted.2 In the 1980s, for example, the United States was annoyed by a huge trade deficit with Japan. Various US industries were threatened by massive Japanese exports and many employees were laid off. Consequently, trade frictions arose in various industries, such as steel, color TV, automobiles, and microchips. The US government imposed trade restrictions to protect threatened industries, believing that they would provide a larger market to import-competing firms, thereby increasing employment. In reality, however, employment did not recover as expected. The US dollar continued to rise against the Japanese yen, causing the price competitiveness of US products to further deteriorate, and new trade frictions occurred. This chapter examines this process of unemployment and currency appreciation due to trade restrictions. It introduces an import tariff into a two-country two-commodity continuous-time competitive model presented by Ono (2006) in which people behave rationally and wages and prices continue to adjust, albeit sluggishly. However, a persistent demand shortage arises.3 In this framework it is found that an import tariff improves the current account...
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