Would protectionist policies (higher tariffs and more quotas) or freer trade policies (tariff reductions and quota eliminations) be more effective in generating currency appreciation?
Take a shot, what do you think.
Hint: the "price" of dollars expressed in euros is the largely determined by the willingness (demand) of europeans to hold dollars instead of euros.
To determine whether protectionist policies or freer trade policies would be more effective in generating currency appreciation, let's break down each approach and understand their potential impacts.
1. Protectionist Policies:
Protectionist policies involve implementing higher tariffs and introducing more quotas, which restrict the influx of foreign goods and services into a country.
Higher tariffs: Imposition of higher taxes on imported goods makes them relatively more expensive compared to domestically produced goods. This leads to reduced imports, which can increase demand for domestic goods and subsequently boost the country's currency value.
More quotas: Quotas restrict the quantity of imported goods and services. By limiting the supply from foreign markets, domestic goods may face less competition, leading to increased demand and potentially appreciation of the country's currency.
2. Freer Trade Policies:
Freer trade policies involve reducing tariffs and eliminating quotas, which promote international trade and the free flow of goods and services.
Tariff reductions: By lowering tariffs on imported goods, they become relatively cheaper compared to domestically produced goods. This can increase imports, promoting international trade, foreign investment, and potentially leading to an appreciation of the importing country's currency.
Quota eliminations: Removing quotas allows for unrestricted imports, leading to increased competition with domestic industries. This can incentivize domestic producers to become more efficient and competitive, ultimately leading to higher exports. Increased exports can result in higher demand for the exporting country's currency, potentially appreciating its value.
Considering these factors, it is generally believed that freer trade policies, such as tariff reductions and quota eliminations, are more likely to generate currency appreciation. By encouraging international trade and competition, these policies can lead to increased demand for a country's goods and services, ultimately strengthening its currency value. However, it is essential to analyze specific economic conditions, market factors, and government policies to understand the potential impact on currency appreciation accurately.