Question

If a government wants to correct a current account deficit, why can’t it simply enforce restrictions on imports?

Answer 1

The government could increase tariffs on imports or even impose quotas. This will reduce imports and therefore improve the current account, but however, such protectionism may lead to retaliation – with other countries placing tariffs on our exports – so exports could decrease and may worsen current account deficit. Protected by tariffs, domestic industries may become uncompetitive because there is less incentive to cut costs, hence, this may lead to inefficiency of firms.