Report says global trade is still dominated by the export of goods that sold better after a cut in the exchange rate

This article is more than 4 years old

This article is more than 4 years old

A 10% fall in the value of a nation’s currency can boost exports by an average 1.5% of GDP, according to a study by the International Monetary Fund that reveals the benefits of a cut in the exchange rate for foreign trade.

Heightening fears that the global economy is likely to suffer a new round of currency wars, the report said global trade was still dominated by the export of goods such as cars and fridges that sold better after a cut in the exchange rate made them cheaper.



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The report forms a key element of the IMF’s world economic outlook, which is due to be published next week when the global lender of last resort holds its biannual meeting in Lima.



Concerns that some of the world’s major nations ducked reforming their economies by opting to devalue their currencies in a desperate dash for trade-driven growth has dogged the debate over the global recovery.

Governments stand accused of embarking on currency wars to defend export industries that would be priced out of global markets without the support of an artificially low exchange rate.

Shinzo Abe, the Japanese prime minister, made it a central plank of his manifesto to improve exports by driving down the value of the yen. He drafted in a new central bank chief, who embarked on a massive programme of electronic money printing similar to the quantitative easing programmes adopted by the Bank of England and US Federal Reserve. The IMF said the yen has fallen by 30% since mid-2012 against a basket of currencies.

The European Central Bank embarked on a similar policy in January, helping the euro to fall by more than 10% since early 2014. Meanwhile, the US dollar is up more than 10% since mid-2014.

The Washington-based organisation said these currency movements since the financial crisis had been “unusually large”, especially the shifts seen in the last couple of years.



“Brazil, China, and India have also seen unusually large changes in their currency values,” it said.

“Not surprisingly, these movements have kindled a debate on their likely effects on trade. Some predict strong effects on exports and imports, based on conventional economic models. Others argue that the increasing fragmentation of production across different countries - the so-called rise of global value chains - means that exchange rates matter far less than they used to for trade, and may have disconnected altogether.”

The IMF’s study found that most trade was still “traditional” and involved the export and import of finished goods and services that were sensitive to price movements.

It said that while global firms have created supply chains that straddle many countries and are insulated from movements in currencies by long-term contracts and hedging instruments, they are not a dominant feature.

IMF officials said they were relieved that a reduction in a country’s exchange rate fed through to trade levels because it meant currency rises and falls continued to act as a rebalancing mechanism in world trade and stimulus to sustainable global growth.

But the wide-ranging report will be seen by some policymakers as providing the evidence governments need to embark on currency manipulation as a means to increase exports.

The finding that a 10% fall in the value of a nation’s currency can boost exports by an average 1.5% of GDP will be enough to spur some governments to adopt policies that devalue their currencies.

Fears have already intensified in recent weeks that Japan will re-double its eforts to drive down the cost of the yen after a 3.5% rise against the dollar and 6.5% jump against sterling in the last month.

Japan’s currency is considered a safe haven in the region, encouraging investors to buy yen assets and drive up its value.

Worried at recent developments, the Bank of Japan governor, Haruhiko Kuroda, said at the weekend that he expects a weaker yen, hinting that the central bank will boost its QE programme.

There is also a warning for the UK, which has suffered a fall in manufacturing exports following a 20% rise in the value of sterling.

The pound has tumbled in recent weeks following a recovery in the euro, but analysts expect the fall to be temporary and for the high value of sterling to continue burdening exporters.

