F REIGN TRADE - 中国国际贸易促进委员会

ECONOMY
When Exchange-rate Volatility
Affects Trade
By Jérôme Héricourt, Sandra Poncet
The increasing volatility of
exchange rates after the fall
of the Bretton Woods agreements
has been a constant
source of concern for both policymakers
and academics. Developed countries
fought hard in the 1980s to limit US
dollar fluctuation (one thinks of the Plaza
and Louvre’s agreements, respectively
in 1985 and 1987), and some European
countries took an even more radical
decision by giving up their national currency
for the euro in 1999.
The underlying intuition is simple:
exchange-rate risk increases transaction
costs and reduces the gains to
international trade. Surprisingly, macroeconomic
evidence of the effect of
exchange-rate volatility on trade, and
more generally on growth, has been
quite mixed, pointing to very small or
insignificant effects. In that context, it
seems quite puzzling to see a number
of countries, especially the emerging
economies, adopting more or less fixed
exchange-rate systems, especially when
one remembers the painful collapses of
south-east Asian fixed pegs or of the
Argentinian currency board at the turn
of the century.
However, more recent work has
emphasised that these results could be
due both to an aggregation bias and an
excessive focus on richer countries with
highly developed financial markets,
since much more substantial negative
effects of the exchange-rate volatility on
trade and growth are found for developing
countries. This column provides
support for both claims, arguing that
there is indeed a negative impact of
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exchange-rate volatility on firms’ exporting
behaviour, magnified for financially
vulnerable firms, and dampened
by financial development.
Exchange-rate volatility,
financial dependence and firmlevel
trade
Several mechanisms can generate
a negative impact of exchange-rate volatility
on trade, proportionally stronger
for financially vulnerable firms – and
consequently weaker with high levels of
financial development. One can think
of exchange-rate risk, which creates uncertainty
for the exporter’s earnings. The
existence of well-developed financial
markets should allow agents to hedge
exchange-rate risk, thus dampening or
eliminating its negative effects on trade.
But this effect is not clearly established,
either empirically or theoretically. In
that sense, mitigation of exchange-rate
risk is unlikely to be the main sources of
the growth-enhancing effect of financial
development found in the literature.
Keeping in mind that sunk costs
of exports are similar to investments
in intangible capital, such research and
development, and that exchange-rate
movements also give rise to sunk costs,
the negative impact of exchange-rate
volatility on exports can be rationalised
through the asymmetry of adjustment
costs leading to investment irreversibility.
Fixed start-up costs for entering the
export market include costs of gathering
information on foreign markets, establishing
a distribution system and, more
generally, adapting products to foreign
tastes and environments. When facing
a real depreciation of its own currency,