Question

1. Should the US follow a more protectionist trade policy? Why or why not? What could be some measures the US can impose to restrict international trade? How would these measures affect the US trade balance, the current account balance, the capital account balance and the value of the dollar? Explain.

Answer 1

With a rising unemployment rate and losing of the domestic market to the foreign market especially China, there was a need to have a protectionist trade policy for the united States. The President has recently increased tariff rates on Chinese goods and some of the Indian goods with the aim to promote domestic companies and increase employment rate in the United States. Thus, there was a need for more protectionist policy and government has taken steps in this direction.

Increasing tariff rates and imposition of quotas on the imported goods are some of the measures taken by the United States to restrict international trade. These measures increase the cost of imported goods and thus reduce the quantity demanded of imports in the nation and increase the demand for domestic goods in place of imported goods.

These measures can increase the trade balance of the United States because this will reduce value of imports in the nation. The current account balance will also improve as trade balance is a part of current account balance of the nation. It will not have much impact on capital account. Since demand for dollars will increase as demand for imports falls, thus value of dollar might appreciate.