Currency Invoicing in International Trade: an Empirical Investigation

The authors investigate the choice of currency of invoicing in international trade under exchange rate fluctuations. Predictions derived from a model developed by Donnenfeld and Zilcha in 1991, and others, regarding the optimal choice of currency of invoice are tested for imports into Canada. The authors employ a unique dataset from Customs Canada that covers a six-year period and lists all currencies used for invoicing by industry. The empirical results support the hypothesis that there is a positive relationship between the extent of invoicing in the importer's national currency and exchange rate risk, and a negative relationship between invoicing in the exporter's currency as well as invoicing in a third currency and exchange rate risk. The empirical results further indicate that relative size of a country plays a role in determining the currency of invoicing.     

Currency Quandary: The Choice of Invoicing Currency under Exchange-Rate Uncertainty

Recent studies have derived optimal invoicing strategies for an exporting firm when exchange rates are uncertain. However, these studies fail to explain trade transacted in a third currency (vehicle currency). In this study, we extend existing models to include the possibility that trade occurs in a vehicle currency. We find that under conditions stipulated by existing models, vehicle-currency invoicing is not preferred. The presence of a competing exporter under imperfect competition, however, can induce vehicle-currency pricing. This is consistent with trade in many primary commodities dominated by few exporters with many importers but where commodities are not perfectly homogeneous.     

人民币贸易结算的影响因素 ——基于大国博弈视角的一般均衡分析

本文利用一个三部门（两个贸易部门、一个非贸易部门）的静态一般均衡模型，分别在名义工资黏性与实际工资黏性条件下分析货币供给冲击对贸易大国之间结算货币选择造成的影响。结论认为，出口商品结构、国内市场销售厂商占本国市场份额与同部门出口商占进口国市场份额的比值（市场份额比率）以及由汇率波动所引起的两国货币交易成本差额的变化对贸易大国之间结算货币选择策略具有决定性作用。为进一步推动人民币贸易结算的发展，中国与美国、欧盟和日本的进口交易可在产业内贸易模式下选取价格替代弹性较大、市场份额比率较高的产品作为推动人民币贸易结算的重点目标，同时应尽快提升人民币的可兑换性和流通能力，并尽量保持币值稳定以降低人民币对其他主要国际货币的交易成本。     

Estimating the effects of non‐discriminatory trade policies within structural gravity models

We propose a simple method to identify the effects of unilateral and non‐discriminatory trade policies on bilateral trade within a theoretically consistent empirical gravity model. Specifically, we argue that structural gravity estimations should be performed with data that include not only international trade flows but also intra‐national trade flows. The use of intra‐national sales allows identification of the effects of non‐discriminatory trade policies such as most favoured nation tariffs, even in the presence of exporter and importer fixed effects. A byproduct of our approach is that it can be used to recover estimates of the trade elasticity, a key parameter for quantitative trade models. We demonstrate the effectiveness of our techniques in the case of most favoured nation tariffs and “time to export” as representative non‐discriminatory determinants of trade on the importer and on the exporter side, respectively. Our methods can be extended to quantify the impact on trade of any country‐specific characteristics as well as any non‐trade policies.     

Trade and business cycle synchronization in OECD countries—A re-examination

This paper re-examines the relationship between trade intensity and business cycle synchronization for 21 OECD countries in the period 1970-2003. Instead of using instrumental variables, we estimate a multivariate model including variables capturing specialization and similarity of economic policies. We confirm that trade intensity affects synchronization, but the effect is much smaller than previously reported. Other factors, like specialization and convergence in monetary and fiscal policies, have a similar impact on business cycle synchronization as trade intensity. The effect of trade on synchronization is not driven by outliers. However, the impact of trade on synchronization is not robust across deciles.     

IMPACT OF EXCHANGE RATE UNCERTAINTY ON COMMODITY TRADE BETWEEN THE US AND AUSTRALIA*

Exchange rate volatility is said to have negative or positive effect on trade flows. Previous studies that considered the impact of exchange rate uncertainty on the trade flows of Australia employed trade data either between Australia and rest of the world or between Australia and her few major trading partners. They were unable to discover any significant impact. In this paper when we disaggregate trade data by commodity between Australia and one of her major trading partners, the US, we find exchange rate volatility to have short‐run effects on trade flows of most industries. However, the short‐run effects last into long run, only in limited cases, though more in export commodities than import ones.     

Exchange rate risk and trade mode choice in processing trade: Evidence from Chinese data

This study investigates the impact of exchange rate fluctuations on the trade mode choices of assembly firms. Using Chinese customs data, we show that exchange rate pass‐through (ERPT) depends on which party is responsible for sourcing inputs. Relative to passively receiving inputs under the pure assembly (PA) mode, foreign‐invested assembly firms mainly source inputs themselves through the import and assembly mode and enjoy lower ERPT. We find that the share of imports through PA increases with exchange rate fluctuations. This effect is more pronounced for firms in liquidity‐constrained industries and mitigated by better local financial development.     

Export Subsidies and Exchange Rate Pass‐through

This paper investigates effects of exchange rate on optimal trade policies and market prices within a standard export subsidy model. Shifts in exchange rate change relative efficiencies of firms in different countries. We show that depreciation of own currency increases subsidy levels when marginal cost is constant. Import dependency weakens this relationship, decreasing sensitivity of subsidy levels to depreciation. In general, subsidies reduce exchange rate pass‐through. Additionally, perverse exchange rate pass‐through effect arises with sufficiently intensive subsidies.     

A Two‐Country Game of Competition Policies

Recently a number of studies have recognized that trade policy can be substituted for by competition policy. This study demonstrates, however, that there is a fundamental difference in the working of terms‐of‐trade effects between competition policy and tariff policy and that if countries optimally set their respective competition policies, it is unlikely to result in a tariff‐war‐like state in which all countries adopt distortionary policies. Instead, in a Nash equilibrium, one country maintains perfect competition in its domestic service sector while the other country tolerates imperfect competition.     

Terms‐of‐Trade Shocks and Exchange Rate Regimes in a Small Open Economy*

We examine the impact of terms‐of‐trade shocks on key macroeconomic variables by numerically solving a dynamic stochastic general equilibrium model of a small open economy. The model considers nominal price rigidity under different exchange rate regimes. The numerical solutions obtained are consistent with the empirical regularities documented by Broda (2004), in which output responses to shocks are smoother in floats than in pegs; in moving from pegs to floats, the rise in nominal exchange rate volatility is coupled by the rise in real exchange rate volatility; and in both exchange rate regimes, net foreign assets is the most volatile variable.     

Growth,Real Exchange Rates and Trade Protectionism since the Financial Crisis

Existing evidence suggests that protectionist activity since the financial crisis has been muted, raising the question whether the historically well‐documented relationship between growth, real exchange rates and trade protectionism has broken down. We use a novel and comprehensive dataset that stretches beyond the traditionally considered tariff and trade defense measures to study the responsiveness of trade policies to business cycles and price competitiveness in the time period since the financial crisis. We find that the specter of protectionism has not been banished. Countries continue to pursue more trade‐restrictive policies when they experience recessions and/or when their competitiveness deteriorates. Our results suggest that the global economy continues to be exposed to the risk of a creeping return of trade protectionism.     

Financial conditions and the well-being of the real estate sector—A bottom-up default analysis on five ASEAN economies

This paper investigates the impact of financial conditions, for example, cross-border capital flows, interest rates and foreign exchange rates, on the well-being of the real estate developers in five Association of Southeast Asian Nations economies. The study uses a Bottom-up Default Analysis model to stress test their creditworthiness by reproducing the financial shocks during the global financial crisis, taper tantrum, and the U.S.-China trade war and COVID-19 pandemic. The median developers remain sound under the prescribed adversities. The performance is underpinned by their strong fundamentals and a conducive mix of monetary, foreign exchange, and open capital account policies by national authorities.     

Black market exchange rates in India: an empirical analysis

In this paper, we explore the determinants of black market (BM) exchange rates in India using annual data from 1955–1994 and integration and cointegration analysis. Two important factors, namely the import capacity of official foreign exchange reserves and restrictions on international trade, have largely been ignored as determinants of BM rates. We stress the importance of these two factors and incorporate them, with others more familiar in the literature, in our theoretical and empirical model for BM rates in India. Our empirical findings show that a low level of official foreign exchange reserves negatively and a high level of trade restrictions positively affect BM rates. We show that the flexible Bretton Woods exchange rate policies for India in 1973 have a negative impact on BM rates. The results also reveal that interest rate policies positively affect BM rates. Thus, our empirical model lends support to the trade and monetary approaches to BM rates and hence, trade restrictions with excess money supply should be removed to eliminate the BMs for forex in India. First Version Received: September 98/Final Version Received: January 2000     

Trade policy under the GATT/WTO: empirical evidence of the equal treatment rule

Abstract. A fundamental difference between multilateral trade agreements like the GATT and WTO and a preferential agreement is the multilateral agreements’ inclusion of a most‐favoured‐nation principle. Though MFN requires that members implement policies that provide equal treatment to all GATT/WTO countries, how far do members actually follow the MFN principle when so required? We empirically investigate a sample of GATT/WTO trade disputes and the effect of successful dispute settlement negotiations on the disputed product trade of third country exporters to the defendant country. We document evidence of trade liberalization consistent with defendant countries successfully applying the equal treatment rule. JEL classification F13     

Asymmetric Effects of Exchange Rate Changes and the J‐curve: New Evidence from 61 Malaysia–Thailand Industries

Research on the impact of currency depreciation on the trade balance is now moving in a new direction by incorporating nonlinear dynamic adjustment of the exchange rate and by using a nonlinear approach to error‐correction modeling and cointegration. Using these advances, researchers find not only more evidence of the J‐curve effect, but also new evidence of asymmetric effects of exchange rate changes on the trade balance. We contribute to this line of research by using monthly trade flow data from 61 two‐digit industries that trade between Malaysia and Thailand, and show that not only does currency depreciation have favorable effects on the trade balance of more industries, but the long‐run effects are asymmetric in 26 out of 61 cases. In line with current literature, our nonlinear model performs much better than the linear model when industry level data are used.     

The role of the most favored nation principle of the GATT/WTO in the New Trade model

I study the impact of the most favored nation (MFN) principle of the GATT/WTO on bilateral trade agreements in the New Trade model. The paper offers four main predictions. First, a bilateral trade agreement without external tariff adjustments hurts the outside country, while a bilateral trade agreement under MFN benefits the outside country. Second, the MFN principle may cause a free‐rider problem. Third, a Pareto‐improving bilateral trade agreement under MFN does not exist if initial tariffs and the elasticity of substitution are sufficiently low. This suggests that the MFN principle may prevent bilateral trade agreements in the future when tariffs are already low and that the definition of “like products” in the MFN rule is welfare improving only if it covers only goods that are closely substituted. Fourth, in the future when tariffs are low, multilateral negotiations and preferential trade areas will become more desirable. Using a calibrated 10‐region 33‐industry model, I show that around 30% of bilateral trade agreements that would be agreed upon in the absence of the MFN rule could not be agreed upon if the MFN rule is imposed.     

Does Liberalization Reduce Foreign Trade Data Discrepancies? Counterevidence from Turkey, 1970–91

This paper questions the impact of protectionist and liberal trade policies on foreign trade data discrepancies. Official records of Turkish exports and imports data are compared with data of the major partner countries (OECD, Germany, USA, Italy, Switzerland, France, UK, Benelux) for the period 1970–91. An analysis of detailed data reveals that the patterns of discrepancies are not common to all countries in the pre- and post-liberal years (i.e. before and after 1980). Hence, the Turkish case does not provide full support for the expectation that faked invoicing disappears with the liberalization of the trade regime. In addition, Switzerland emerges as a very exceptional trade partner, as compared with other partners, for both imports and exports. Turkey's exports to Switzerland are overinvoiced up to 700% until 1985, the rate of overinvoicing decreases to 200% after then. On the other hand, imports from Switzerland are overinvoiced up to 250% until again 1985. Overinvoicing of imports disappears in the wake of 1983 December measures. A comparison of imports and exports data of Switzerland with data of the above stated countries reveals that Turkey is also an exceptional partner for Switzerland. The patterns of discrepancies in foreign trade data might be closely related to capital transactions, noting that Switzerland offers the world favourable conditions for financial transactions. We also note that general patterns can be related to those of some specific commodities which might act as a means of transferring capital because the details of the trade regime regulations concerning them can be easily identified. Yet, generally speaking, the consequences of policy implementations do not straightforwardly match with expectations.     

THE J CURVE: CHINA VERSUS HER TRADING PARTNERS

The short‐run effects of currency depreciation are said to be different from its long‐run effects. In the short run, the trade balance deteriorates and improvement comes after some time; hence, the J‐curve phenomenon. Previous studies that tested the response of the trade balance to exchange rate changes in China employed aggregate trade data and provided mixed results. Indeed, most of them concluded that real depreciation has no long‐run impact on the Chinese trade balance. In this paper, we disaggregate the data by country and using recent advances in time series modelling estimate a trade balance model between China and her 13 major trading partners. We show that real depreciation of the Chinese currency has a favourable impact on her trade balance with a few partners, especially the USA. Not much support is found for the J‐curve hypothesis.     

Exchange Rate Regimes and Welfare Losses from Foreign Crises: The Impact of the US Financial Crisis on Mexico

We modify the Gali and Monacelli small open economy dynamic stochastic general equilibrium (DSGE) model, calibrate to Mexican data and simulate the impact of the financial crisis on Mexico, under floating and counter factual fixed exchange rates. The floating exchange rate ameliorates welfare losses for Mexico. They are greater under fixed exchange rates because the return paths to equilibrium are more volatile (higher variance) and output, consumption and employment impulse response functions (IRFs) overshoot. Monetary policy, inflation targeting with floating exchange rates, clearly reduced the welfare costs vis‐à‐vis other counter factual policies including consumer price index‐based Taylor rule, domestic inflation Taylor rule and fixed exchange rates.     

Making small firms happy? The heterogeneous effect of trade facilitation measures

The different facets of trade facilitation may impact heterogeneously exporters of different size and productivity. Using the cross‐sectional variation in procedures at the border, we identify how red tape affects trade through the extensive and/or the intensive margin and show that small and large exporters are affected differently. We observe that while information availability benefits both small and large exporters, other measures like advance ruling, appeal procedures and the automation of border formalities tend to favor large exporters. This result suggests that trade facilitation policies affect exporters through channels other than simply the fixed or variable cost component of the red tape barriers. Beyond affecting the size and composition of trade flows, uncertainty about the conditions of crossing borders plays an important role in shaping the demography of exporters across different destinations.