Establishing public control

In general, there are two types of public controls: foreign-exchange controls and trade controls. Think, for a moment, of a case in which increased Mexican imports create a shortage in its foreign exchange. Under exchange controls, the Mexican government would force its exporters and other recipients to sell their foreign exchange to the government or to designated banks. Then, the government would allocate this foreign exchange among the various users of foreign exchange. In this way, the Mexican government could restrict Mexican imports to a certain amount of foreign exchange earned by Mexican exports. Thus, imports under exchange controls would be less than they would be under free market conditions.

When governments are faced with a serious payment deficit, they may manipulate exports and imports through tariffs, quotas, and subsidies. High tariffs on imported goods and import quotas by Mexico would reduce Mexican imports. On the other hand, the Mexican government might subsidize certain Mexican exports to make them competitive in world markets and to increase the volume of exports. Special taxes on foreign direct investments by Mexican firms would tend to reduce Mexican capital outflows. However, these protectionist policies might increase inflation, erode purchasing power, and lower the standard of living.

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