Impact of Tight Monetary Policy and US Protectionism Policy on Global Economy

This article discusses the impact of tight monetary policy and US protectionism policy on the global economy. It covers the risks posed by a tight monetary policy, the reasons behind US protectionism policy against China, and the implications of the policy on the US economy and industries.

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The Global economy
By (Name)
Course
Instructor’s Name
Institutional Affiliation
The City and State
The Date

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\Question 1
The political maneuvering or management of the economy is known as the monetary
policy. The monetary is made by the Federal Reserve Bank in the US. Prime interest for lending
and discount is set by the Federal Reserve. When landing to each, the interest rate charged by
banks is the discount rate. When customers borrow money, they are charged with prime rate.
When interest rates are increased, then it means that the economy is tightened, this lead to
various intended impacts in business and personal environments. The main objective of a tight
monetary policy is to effectively reduce the amount of money supply that is available in the
economy and bring about a fall in the total aggregate demand. Serious policy blunders may arise
as a result of the implementation of a tight monetary policy by the US due to the pressure caused
by pickup inflation. The tightening of the monetary policy by the US may result into other banks
like the ECB to loosen policy again due to the excessive tightening in global financial conditions
and others problems (Wu and Xia 2016).
Therefore to keep the policy loose there is a risk that it may result into a nasty marker sell
off and hawkish Fed. Policy analysis argues that the restrictive monetary policy being undertaken
by the Fed may bring another recession to the United States of America (Taylor and Weerapana
2010). It is important to note that in its easing program, the fed bolt up over 4.5 million dollars in
securities such as bonds and others. At a faster pace monetary conditions are tightened by the
dual approach of hiking rates while cutting asset holdings. Therefore, such policy ultimately
results and of the monetary policy that is accommodating (Mankiw 2006).

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Thus the tightening of the monetary policy poses a number of risks to the domestic and
global economy. The economies of the US and other countries can be derailed in case there are
abrupt changes in conditions in global finance. It is imperative to note that the various financial
vulnerabilities that have been attained or accumulated in the period of extremely low volatility
and rates pose a huge risk to economic growth(Graceffo 2017). It is good for interest rates to be
raised by the central bank in a relatively communicated and gradual manner to avoid risks
associated with tighter monetary policies on both the domestic and global economy. A tight
monetary policy if not well implemented may reduce the overall production levels. The fall in
the demand for products coupled with high and expensive capital for investment means that there
will be reduced production in the economy. A more tight policy can make organizations
shuttered planned expansions and at the same time reduce on the levels of productions. Therefore
a tight monetary policy needs to be effectively managed otherwise it is capable of driving
economies into recessions (Gomory and Baumol 2009).
Further, the increasing levels of interest rates and reduced productions hinder job creation
and industrial expansion hence fueling the unemployment problem(Fleuriet2008).Limited
employees are likely to be hired by organization when there are reduced production and
profitability levels. It is important to note that most business aim at profit maximization, once the
costs of production are higher than the profits, any rational investor will look for ways of cutting
down the costs of production which may involve among others shutting down some of existing
plants, reducing the size of workforce and production. Economic contraction is made extremely
severe when there is increased unemployment due to the fact that it reduces demand for services
and products(Feenstra et al 2009).

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Economic growth is usually affected by a tight monetary policy mainly due to high levels
of interest rates. High interests make the accessibility of capital of inform of loans difficult and
expensive. Meaning that less people will be able to participate in the production process due to
limited credit access. Also the available enterprises collapse or fail to expand. Hence a result
there is limited investment levels in the economy meaning lower levels of economic growth. A
tight monetary policy is very risk and requires a high level of prudency to be effectively
managed in order to guard against the potential risks it put on both the domestic and global
economy (Evenettand Fritz 2017).
Also, cases of cost push inflation are likely to occur as a result of the policy. For instance
the global oil prices may increase due to the US tight monetary policy. Given that oil is used
across the word, cost push inflation may occur(Dunn 2015 ). It is important to note that a tight
monetary policy is good when there are high levels of confidence in the economy since despite
high interest rates may continue to spend and borrow. However, this may not be the case in the
US and other economies posing a lot of risks to the overall levels of economic growth and
development(Douma& Hein 2013).
Further, there risks of conflict with various macro economic variables due to the tight
monetary policy. A tight monetary policy hinders access to particular services that are vital for
economic growth and development due to higher interest rates. Most businesses and individuals
in the economy use loans to start and at the same time grow there businesses. By raising interest
rates it means that your are discouraging the development and establishment of medium, small
and large enterprises in the economy. Given that the inflow of both local and foreign investors
informs of FDI is discouraged. It is important to note that most investors desire to undertake
there investment ventures in areas where there is a low cost of doing business. Thus a tighter

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monetary increases the costs of doing business and at the same time reduces the overall levels of
aggregate demand and supply (Denison et al 2012).
The developments in the globally economy affect all economies whether small or big.
Large industrialized economies like USA have to be prudent while developing there monetary
policies. In the current times where there is a general fall in level of demand in most emerging
economies, the US tight monetary policy may worsen the problems being faced. A strong
disinflationary impulse has been degenerated by a relatively weaker demand globally. Global
demand is to larger extent influenced by growth in the US. Therefore a tighter monetary policy
may have a huge negative impact on the global demand given that it is not sustainable enough to
encourage demand leading to disinflationary pressure globally. Also mismatches and weaknesses
may be revealed among borrowers which have not been anticipated by investors due to the
unexpected sharp increases in the interest rates. This may adversely impact most of the emerging
markets(Curdia and Michael 2009).
Conclusively, the effect of a tight US monetary policy on both the domestic and global
economy is enormous. A number of policy makers, economists and other professionals have
divergent views of the overall effect of a tighter monetary policy on both the global and domestic
dynamics. However, what is clear is that it poses a number of risks on the aggregate demand of
goods and services, investments, employment and production both in the domestic and global
market
Question 2

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Protectionism is as old as the global free trade system. In a bid to boost trade
however, there has been a general decline in the non tariff barriers in both developed and third
world countries of the world in Africa, America, Asia, Europe and others (Kourdoumpalou &
Karagiorgos 2012). The desire to increase the value of the currency and at the same time reverse
the impacts on import prices is the main driver of the US policy on trade protectionism against
the people's republic of china. It is imperative to note that the US protectionism policy against
china is mainly centered on increasing tariffs on goods and services imported from china. Just
from the table provided, it is clear that the people's republic of china has been exporting more to
the US than importing which has led to a number of economic implications to the US. According
to economics, when imports exceed the overall total exports the economy begins to operate in
deficits. Now it is clear the US is currently having deficits (Bryan and Brent 2010)
The US trade in china is a zero sum game where by china wins and the US looses. It is
important to note that over the years, china has been implementing the philosophy of
merchentalism that focuses of encouraging exports and discouraging imports. Therefore it is not
a surprise; the economy of china that was once underdeveloped is currently operating in surplus
and is a very big threat to the US in terms of world's dominancy (Maloney & Manrakhan 2007).
The Chinese are operating in each and every part of the world both developed and emerging
economies. Therefore, for purposes of protecting its overall industries, trade interests and others,
the US has seen it wise to limit the inflow of Chinese imports through raising the tariff levels
(Brasher and Perlez 2018). Protectionism is usually informs of tariffs and subsidies. The main
aim of subsidies is to encourage production through reducing the costs of doing business while
tariffs aim at discouraging imports from flowing into the economy. This in turn increases the
overall levels of competitive advantage of producers.

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The desire by the US to facilitate the creation of more jobs and also increase the overall
market share levels of its industries has also led to the protectionism policy against Chinese
products. Tariffs limit the inflow of imports leading to the emergency of import substitution
industries in the domestic economic (Bhagwati 2009). This in the long run results to the creation
of jobs for the citizens and at the same time a widened tax base leading to high revenues.
Therefore the protectionism policy is being undertaken by the US against china is a strategic
move aimed at encouraging sustained economic growth and development. Reliance on imported
products from china is a huge threat to the local and emerging industries given that it they
cannot effectively compete with the already established firms in china that have a large market
share, large economies of scale and others. Therefore local industries can only be promoted
through imposing tariffs to make imported items expensive and thus encourage citizens to
purchase locally manufactured products (Ryan & Stähler, 2012).
Over the years, the overall trade between the US and china has not been equally
beneficial with the later gaining more than the former. Such deficits has resulted into balance of
payment challenges for the US leading to low levels of growth rates being enjoyed by the US.
The pace at which the Chinese economy is developing over the recent years is far higher to that
of the US threatening its overall economic position as a super power. Thus to counteract such
cases the US has seen it wise to impose high tariffs on Chinese imported products ( Aharoni &
Brock 2010).
Also, the people's republic of china continued production of steel is a threat to the
overall US security. It is important to note that china posses a comparative advantage in still
production. In other words, it is capable of producing still at cost efficient and effective manner.
Similarly, china has so long engaging it’s self in currency depreciation. The depreciation of the

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Yuan makes Chinese exports cheaper leading to higher levels of demand. Chinese intentional
depreciation of its currency has effectively paved off with Chinese products being demanded all
over the continent. In fact Chinese business and industries occupy most parts of Africa and
other emerging and developing economies of the world. Therefore to counteract the effect of
depreciation of the Yuan currency on the demand of locally produced products, the US has
decided to increase the level of tariffs charged on Chinese imports otherwise it may end up
losing both the domestic and foreign market to china (Aichelle et al 2016).
In a bid to destroy the US Exports market. Chinese has been accused of undertaking
dumping strategies. In other words china sells its products in the US at relatively lower prices
than in its domestic market (Maloney & Manrakhan 2007). Therefore as a way of encouraging
the US exports trade, policy makers have seen vital to increase the tariff rates on Chinese
imported products. It is imperative to note that in by its very nature dumping is one of the forms
of price discrimination and anti predatory pricing behaviors undertaken by economies. There is a
short term benefic from foreign dumped goods by the consumers in short run inform of low
prices. However such is very harmful to domestic industries given that they are likely to be
forced out of business due to increased competition from low priced products imported from
china making Chinese companies monopolists in the US economy. Monopolism is dangerous
both to the consumer and the economy there for the US has decided to increase tariffs on
imported goods to prevent the occurrence of such instances.
Also the Chinese behavior of transferring technology and intellectual property from the
US may have resulted into the protectionism policy being undertaken by the US. The Chinese
have been unlawfully extraditing technology and knowledge from United States industries before
permission to operate in their country. China has been doing such too out competes the US as a

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world's economic super power. However, such moves are in total violation of the canonies and
principles governing free and open trade. Thus the US has undertaken protectionism against
china as a way of safeguarding against such behaviors being carried out by china. It important to
note that in the global economy intellectual protection of property is a critical risk. In the
domestic market patents are vital in enabling the innovation to be given adequate protection for
purposes of facilitating the generation of the returns on the various substantial undertakings or
investments. Therefore the stealing of intellectual property rights by china is a big threat to the
various innovations being undertaken by the united states of America and hence threatening its
overall economic growth and development objectives (Bosworth & Collins 2007).
Moreover, the bargaining power of the US in the world economy has been declining over
the years. Therefore to effective create or attract more employment opportunities and capital, it
has seen as strategically relevant to engage in trade protectionism. Therefore it is important that
the context of jobs argument been put forward while explaining the US protectionism policies
against china. Conclusively, a number of social, political and economic factors are behind the US
protectionism policies against the people republic of china as discussed above

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