Question

EXPLAIN HOW TRADE RESTRICTIONS AFFECT EXCHANGE RATES, AND GIVE AN EXAMPLE

Answer 1

Trade restrictions or trade barriers are restrictions applied on free trade policies. These are applied through import or export policies among countries. For example, tariffs (taxes charged on impoted goods) and quotas (restricts the quantity of foreign goods the can be impoted).

Import and export plays a vital role in deciding a country's currency rate with respect to exchange rate. Because factors which appreciate or depreciate countries currency are GDP, interest rates, inflation and international trade that is import and export.

we will focus on balance of trade that is balance of import and export. If a country's imports are more than its exports that will be called trade deficit that will devalue or depreciate its currency but if a country's exports are greater than its imports it will appreciate the country's currency. So, to save their economy or save their currency some countries restricts the trade by charging tarrifs and quotas. Applying trade restrictions appreciate the currency of a country in long run.

For example, when U.S. charged 50% tariffs on LG and samsung washing machines. Because these two companies were selling their washing machines at low cost in U.S. and capturing its market which will increase the imports for the same product with high demand in U.S. markets. So, to save U.S. currency not to increase its imports more than its exports U.S. charged 50% tariffs from LG and samsung.