Introduction

In the economics profession, opinion on whether exchange-rate variation encourages protection has undergone a substantial turnaround since the move to a managed-floating exchange-rate regime. Prior to the adoption of flexible rates in 1973, the foremost proponents of floating rates expressed the prognosis that floating rates would result in a diminution of pressures for protection. In contrast, some twenty years after the breakdown of the Bretton-Woods system, a number of writers have attributed rising protectionist pressures to the very system that was supposed to see the abatement of such pressures. For example, as Goldstein (1984, p. 42) has noted that, “if transitory or excessive movements in exchange rates are perceived as being a primary cause of the decline of certain export-or import-competing industries, they can generate pressures for protectionism.”

What has actually happened over the past twenty years to the relationship between exchange-rate variability and protection? Have the foremost proponents of floating been vindicated, or has floating exacerbated pressures for protection? This chapter attempts to address these and other issues regarding the relationship between exchange-rate variability and protection in terms of trade performance.

This chapter is divided into five sections, including this introduction. The next section traces the changing nature of academic discourse on the subject of exchange-rate flexibility and protection. As will be shown, not all writers view the variations in exchange rates that have occurred since the adoption of floating rates as harmful to trade or conducive to protectionist pressures.