Employment, welfare and reserve effects of global protection

Summary

In this article it is shown that expenditure-switching policies, like exchange rate protection, tariff protection and export subsidizing, might increase the level of employment and welfare in the short run (when indexation of factor prices is absent). Complete indexation of factor prices, however, makes exchange rate protection senseless. In the case of tariff protection, complete indexation will even worsen employment and welfare (protection becomes impoverishing).

Only a policy of export subsidies makes sense if employment is to be improved in an indexed economy. This additional employment, however, is paid for with a deterioration of the terms of trade and the risk of retaliation. Therefore, taking the long run view, expenditure switching policies should be rejected for macro-economic purposes.