Does Exchange Rate Misalignment Mediate the Effect of Tariff on Exports: An Example of US Tariff and Canada Exports in Steel and Aluminum

Abstract: Exchange rate is an important price ratio interacting with both real and nominal variables. It is not clear yet how the misalignment of exchange rate can interact with trade policies and affect trade flows. This paper tries to answer the question in the case where Tariff is shortly levied by the US on Canada exports in steel and aluminum. Exchange rate misalignment is hypothesized to partially mediate the impact of the Tariff on Canada steel and aluminum. To test the hypothesis, this paper first estimates exchange rate misalignment from exchange rate and other determinants before using the estimate in turn to detect its influence on exports. No evidence is found in this paper that supports the hypothetical mediation model, although the direct effect of Tariff on its corresponding exports is significantly supported.