The apparent popularity of Donald Trump's demand for protectionism raises a question: why haven't exchange rates done the job they were supposed to?

I ask because one justification of floating exchange rates back in the 1970s was that they would render protectionism redundant. If a country ran a trade deficit, the thinking went, its exchange rate would fall, thus improving its competitiveness and pricing its workers back into jobs. As one of my old textbooks put it:

If the exchange rate is free continually to equilibriate the balance of payments, a country's policy-makers should not have recourse to protectionist devices for balance of payments reasons: the freeing of exchange rates should usher in a period of more liberal trade (Ronald MacDonald, Floating Exchange Rates, p4)

For a long time, this looked valid: trade barriers have indeed fallen since the 70s. So, why is there now a call for tariffs rather than for exchange rate adjustment?

You might think the answer is simple: China has fixed its exchange rate to keep it artificially low and therefore its exports cheap.

But this isn't entirely true. China has fixed its nominal exchange rate. But because it has had higher inflation than elsewhere, its real exchange rate has risen a lot - by over 40% in the last ten years according to BIS estimates.

You might think that even this appreciation hasn't been sufficient: perhaps the US's status as a reserve currency under the "Bretton Woods II" system has sustained demand for dollars and so prevented the US dollar falling as much as it should.

Maybe - although this overlooks the fact that the US's lack of competitiveness because of high wages is greatly offset by the advantage it enjoys of cheaper energy.

But perhaps there's another reason. Maybe exchange rates don't equilibriate the balance of payments after all. Let's suppose China were to greatly revalue its currency? Would more expensive Chinese exports thereby improve the lot of US workers? Yale's Ray Fair has used his econometric model to answer this. His finding is that:

The net effect of the yuan appreciation on U.S. output and employment is close to zero-in fact slightly negative. (p194 of this pdf)

There are two reasons for this. One is that a rise in the yuan would cut China's output generally, and this would reduce US exports. The other is that dearer Chinese imports would raise the prices faced by US consumers, thus reducing their real incomes. These factors offset the tendency for a dearer yuan to make US goods more competitive.

This suggests that there might be a grain of truth in the call for tariffs, insofar as exchange rate adjustments don't work.

But of course, only a grain. There are many better ways of helping unskilled workers: looser macro policy, welfare reform, a jobs guarantee and so on. Such policies have the added virtue of protecting such workers from the myriad (and I think greater) other threats to their livelihoods.

Rather than say this to endorse Trump, I do so to attack the mainstream. The presumption that free markets and floating exchange rates would protect workers from cheap imports might well have been wrong, and it distracted attention from the need for policy interventions to help the (minority of) workers hurt by them. In this sense, Trump's victory represents a failure of centrist policy-making.