Currency swings have been unusually large of late but experts are divided about how those exchange rate movements really affect trade.
Some say currency movements have strong effects on trade, according to a new International Monetary Fund (IMF) report, while others have come to believe currency devaluations don’t drive growth like they used to.
The U.S. dollar has appreciated by more than 10 percent since mid last year, the euro has fallen by the same amount since early last year, and the yen is down upwards of 30 percent since 2012.
“Such movements, although not unprecedented, are well outside these currencies’ normal fluctuation ranges. Even for emerging market and developing economies, whose currencies typically fluctuate more than those of advanced economies, the recent movements have been unusually large,” IMF noted.
Historically, according to IMF, exchange rate fluctuations in emerging and developing economies have had sizeable effects on import and export volumes—a 10 percent currency depreciation generally results in a rise in exports of an average 1.5% of GDP—because cheaper currencies make exports more appealing.
Appreciating currencies, however, could slow growth as net exports fall.
That said, “There is little evidence of a general trend toward disconnect between exchange rates and total exports and imports,” according to the IMF. A disconnect between the two could reduce the boost in exports that comes with exchange rate depreciation when the monetary policy eases, and it could complicate the resolution of trade imbalances.
Manufacturers have been making more product in multiple places, with different stages in the development cycle done in different economies, a trend IMF calls the rise of global value chains. This “production fragmentation” weighs on any gains from currency depreciations because multiple economies and their respective exchange rates are also factored in.
“In general, increased participation in global value chains could lower the effects of exchange movements on trade prices and of trade prices on trade volumes,” IMF noted, adding however, that growth in global value chains has increased slowly in recent decades and has recently slowed. The bulk of global trade is still sourced domestically.
The world’s recent exchange rate movements are expected to result in redistribution of new exports across economies.
“With regard to direct effects on trade, the real effective exchange rate movements since January 2013 point to a redistribution of real net exports, from the United States and economies whose currencies move with the dollar, to the euro area, to Japan, and to economies whose currencies move with the euro and the yen,” the report noted. “Among economies experiencing currency depreciation, the rise in exports is likely to be greatest for those with slack in the domestic economy and with financial systems operating normally.”
The effects of these currency movements vary widely across different economies. As the Wall Street Journal noted by way of example, Venezuela saw a 12 percent dip in GDP from net exports when the U.S. dollar—which the country’s bolivar is pegged against—appreciated, but Ukraine’s exports should see a 4 percent uptick on the fall of is hryvnia.
In the U.S., the dollar’s rise is cutting 0.8% of GDP from net exports, according to the Journal, and in China, the stronger buck has contributed to a net export decline of 1.9% of GDP.