Aspects of the Theory of Tariffs (Collected Works of Harry Johnson)

14.  A Model of Protection and the Exchange Rate^*

One of the assumptions commonly made in the context of liberalization of trade by underdeveloped countries is that such liberalization would necessarily involve a balance of payments deficit and the consequent necessity of devaluation, which such countries are unwilling to undertake. This note presents an analysis of the problem, using a simplified production model which nevertheless allows for input–output relations among industries and hence for implicit as distinct from nominal protection. The analysis reveals the possibility that tariff structures may bring about a situation in which appreciation rather than depreciation would be necessary to preserve equilibrium under trade liberalization; ...