If there is a current account deficit, why might there be more protectionalism measures e.g. tariffs,quotas?

Question

Please help I really dont understand this. Kind regards Colin

Please answer in terms of exchange rates - did the US trade deficit cause the dollar to appreciate and depreciate and how did this affect imports/exports?

Answer 1

Your second question is quite different from the first. The answer to this....... "Please answer in terms of exchange rates - did the US trade deficit cause the dollar to appreciate and depreciate and how did this affect imports/exports?" ........ is "no". The value of the US$ against other currencies is mostly determined by capital market movements. The capital account is all of the balance of payments except the current account. When US interest rates go up relative to foreign interest rates, the dollar usually strengthens.

The answer to your original question is that governments are more likely to introduce or increase tariffs and quotas because they think it's a way of curbing imports and therefore reducing the current account deficit. But actually the main pressure for higher quotas/tariffs in a conutry like the US comes from vested interests. When imports of, say, autos rise, the home manufacturers of autos clamour for protectionism and so do the congresspersons who reperesent their workers (who will otherwise be laid off). Protectionism is economically bad for the country, it benefits specific producers (in my example, of autos) but everyone else foots the bill. Consumers have to pay more for autos, so the standard of living is reduced (compared with what a free market would give); business costs go up because they have to pay more for trucks (so productivity is less and US business is less competitive). Workers are stuck in Detroit putting wheels on cars instead of moving up to something where they can earn more. Via the usual "multiplier" effects of economic change, protectionism harms everyone, not just foreigners.

Answer 2

This describes the US these days... ;-)

Think of it this way. If I know that I'm importing more than I am exporting (and this is causing my current account deficit) then I either have to increase my exports or cut back my imports to avoid deficits. Since increasing exports is difficult as the government has little control over the primary (local) factor controlling this; price. This leaves cutting imports to balance the books. How to do that? Make imports less attractive to the consumer. This means raise the cost (to the consumer) of imported goods through tariffs or, in the case of goods with good price elasticity, by limiting supply via quotas.