ECONOMIC

Among the industrial countries, those with the most stable domestic conditionshave apparently had a larger share in the expansion of world exportsthan those with continued high inflationary pressures. This developmenthas occurred despite the large exchange rate adjustments during 1975and 1976 which helped to offset differential developments in inflationrates (Chart 7). The full effects of changes in relative exchange ratesare felt only after a considerable lag. Given the existing slack in capacityutilization and the vigorous upturn in world trade, however, one might expectthat countries with depreciating currencies would have shared atabove-average rates in the trade expansion. In the event, throughout 1976the United Kingdom, for example, has been unable to maintain its exportmarket shares, at least in trade in manufacturers, compared with other industrialcountries. Italy's share was reduced through the first half of theyear, and France may have begun to lose shares as well (Table 29).The failure of trade flows to respond quickly to changes in exchange ratesis often attributed to the failure of such changes to show up immediatelyand fully in transaction prices. But the price side tells only part of thestory. If export prices, expressed in foreign currency, are not adjustedquickly to reflect exchange rate changes, profits on export sales will riseand selling abroad will become significantly more lucrative comparedwith domestic sales. It is therefore reasonable to presume that, particularlyat times of low general profitability, the leverage exerted by exchangerate changes on the supply side may be greater—at least in the shortrun—than the leverage on demand arising from increased price competitiveness.Because there is considerable evidence that some countries which haverecently experienced relatively large depreciations of their currencies havenot adjusted their export prices in foreign currency to the extent that mightbe expected, the profit argument would have provided further grounds forexpecting these countries to maintain, if not to improve, their export marketshares.In view of the above discussion, it may be surprising that some "strongcurrency" countries, especially Germany and Japan, have not only maintainedbut increased their shares in export markets. Several explanationssuggest themselves. Countries with relatively low inflation rates tend tohave lower interest rates and may therefore be able at a time of highdomestic liquidity to offer more competitive financing terms. Unfortunatelydata on such nonprice components of export transactions arenot available. But because a number of countries exempt export credittransactions from the effects of tight domestic monetary policies, andbecause the cost of forward cover may partly offset differences in uncoveredrates, this explanation takes one only part of the way. Stronger circumstantialevidence exists for a structural explanation relating largely toso-called big ticket items. It is thought that countries with a relativelystable price performance and relatively little social strife and labor disruption,such as Germany and Japan, have a structural advantage in cap-114