From the National Bureau of Economic Research, here is the latest on the J-curve:
The pattern of international trade adjustment is affected by the
continuing international role of the dollar and related evidence on
exchange rate pass-through into prices. This paper argues that a
depreciation of the dollar would have asymmetric effects on flows
between the United States and its trading partners. With low exchange
rate pass-through to U.S. import prices and high exchange rate
pass-through to the local prices of countries consuming U.S. exports,
the effect of dollar depreciation on real trade flows is dominated by
an adjustment in U.S. export quantities, which increase as U.S. goods
become cheaper in the rest of the world. Real U.S. imports are affected
less because U.S. prices are more insulated from exchange rate
movements – pass-through is low and dollar invoicing is high. In
relation to prices, the effects on the U.S. terms of trade are limited:
U.S. exporters earn the same amount of dollars for each unit shipped
abroad, and U.S. consumers do not encounter more expensive imports.
Movements in dollar exchange rates also affect the international trade
transactions of countries invoicing some of their trade in dollars,
even when these countries are not transacting directly with the United
States.
Here is the paper. This asymmetry is no accident but rather stems, in large part, from the central role of the dollar as a reserve currency and a medium for invoice pricing. When an Asian export is priced in terms of dollars in the first place, exchange rate movements lead to less pass-through. In other words, to the extent we would see an improvement in our trade balance, from dollar depreciation, it would be vis-a-vis the countries with the highest propensity to consume more American exports. It would not be with the countries whose exports we are most likely to consume. This also means that we cannot in every way extrapolate European currency experience to the United States.
If you look at the apparent recent improvement in the real
trade balance you will see that export growth is improving
significantly while import growth may or may not be slowing–
and that slowing may be more a function of changes in domestic demand.
So emerging trends may be right in line with what the paper implies.
US exports would be affected much less than expected, and trade balance would worsen in a sense,
because the production of US productions have been soooo localized or globalized.
The most common goods of US in the world market is: Coca Cola, Pepsi, McDonald, AutoMobiles,
Dell/HP Computers,Nike/Addidas shoewear, or many other products that have been enjoying low cost of localization.
When dollar depreciates, world comsumers would continue to consume the products the local products branded in
a US firm, usually cheaply. Few people would buy Cola, Pepsi, Burger,Cars, Dells, Nikes, etc, simply because
US native products are offering 5% discount. People would not do it, because there are immense transportation cost
incurred the two big oceans on both side of America.
On the contrary, there would be more US firms moving out of USA, because goods would grow more costly to produce in America.
Another thing is the worsening of domestic consumers’ welfare, as they would enjoy less the low cost goods
produced by US trade partners. But,world consumers would not likely consume more US-produced goods, either
because US goods have been produced locally, or US goods are kept away by the Altantic and Pacific Oceans.
I would say, the exchange rate elasticy of US exports is low.
What about the oil equation? US production continues to decline, US population continues to increase, and a loss of value in the dollar would drive the price higher. You can’t assume all trade is just manufactured goods. Raw materials, especially oil, puts a bust in the theory. Exporting a manufacturing base and importing an energy base is a big problem. the deficits will only get bigger with a devalued dollar, as they have since 2001.
Doesnt that seem to mean that dollar devaluation would be an overall good thing for the US in which case we should push for it at all costs? If you think about what that means, it doesn’t even make intuitive sense.
Barkley,
I disagree.
Over the last six months, the Euro and the Canadian dollar have fluctuated almost in lockstep against the RMB and the USD:
USD to EUR – http://www.exchange-rates.org/history/USD/EUR/G/180
RMB to EUR – http://www.exchange-rates.org/history/CNY/EUR/G/180
USD to CAD – http://www.exchange-rates.org/history/USD/CAD/G/180
RMB to CAD – http://www.exchange-rates.org/history/CNY/CAD/G/180
It took its time, but I think it’s here…two currencies beat as one.
I predict the yen will join the pack soon, Barkley…in the meantime, there might be some money to be made off the yen.
Wonder what George Soros is trading these days…
Dollar Continues to Depreciate , 2007 around Six Months it depreciated by 13% against Rupees.
What Makes Dollar Strong?
1. If Dollar continues to depreciate the Foreign Consumers, try to rework their Exports to US or Services,
Which will further increase the Price, in US Domestic Market,,,, Are you ready to Face it Up?
Why Dont US by itself make Jobs, rather than Importing Services and Products in China,India,Mexico. If they
manufacture things here itself rather than going to either China, Japan or Korea. ?,
Dont Say US Labour Cost is More. For Example,
One Small Company XXXX manufactures Pen in YYYY Country Costs 5$ Now in US Market
, Suppose If dollar deprecaties further like 5%,either then if the XXXX Company keeps the same margin of profit means then needs to increase its price 5%. else Its Operating Margin is going to the ZZ-5%. So,
If we can produce sam here With lesser costs using technology and Power in a Smart way, with some
what lesser costs then US is Earning a Money, It Creates Job, Its Now Not depends on YYY Country.
So that Partcular 5$ for that Pen will not go to the County YYY FOREX Reservation. So Infaltion Stops in US.
US Ready to Face Up Low Cost Worker…? Operational Efficient offices, More Job Opportunities..
It Depends upon the comfort level of People.
This is the right time to create More Jobs and Gain More…Invent More and Innovate. The Point is
Reached Wake US Economy………
Compete Globally, Make Global People interests in US Product, Deliver them in Cheap cost????
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