A Strong Currency Is No Good Reason to Keep Tariffs High

An interestingdebate has arisen in Ecuador during recent weeks over the following proposition advanced by authors at a Quito think tank: a dollarized country shouldn ’t reduce its tariffs when the dollar is overvalued relative to the currencies of its regional trading partners (according to purchasing-power-parity measures) because that would undermine its “competitiveness” in export market. As several commentators have noticed, this is reminiscent of the Mercantilist view that a country will lose too much of its gold if it does not discourage imports with tariffs or promote exports with subsidies, a view that David Hume and Adam Smith debunked long ago.The debate began with the publication ofan essay by Jos é Hidalgo Pallares and Daniel Baquero for CORDES, a leading economic policy think tank in Quito. They proposed that it is not “convenient” to reduce the general level of tariffs at the moment, with a strong dollar already making imports cheaper and exports more expensive for Ecuador, and with t he economy operating at below capacity. Their concerns were macroeconomic and balance-of-payments related:  “In recent years, imports have also grown more than exports … [T]he trade balance, which is one of the main components of the current account, registered a deterioration: from a surplus o f $227 million in the first quarter of 2018 to one of just $2 million in the same period of 2019.” Reducing tariffs across the board, they argue, “would mainly favor cons...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs