September 2017


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$ Impact on Exports [ Graphs ]



"Pass through" and supply chains can complicate the picture.


Does the Value of the Dollar Impact Tennessee Exports?

Does a rising dollar create a more difficult environment for selling goods overseas?
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We recently revised the Tennessee Trade-Weighted Dollar Index. This index measures the strength of the dollar, a major issue for state exporters. A rising dollar, obviously, should create a more difficult environment for selling goods overseas. But by how much? A lot or a little? There is a large literature on this, and not everyone agrees! The consensus is that the impact is significant, upwards of an annual 1.5 percent drop in exports when the weighted exchange rate rises by 10 percent. This drop is not immediate. There can be a lag of up to two years for the maximum impact to occur. This is because many export orders are not delivered for some months after they have been placed. So it takes a while for the currency change to show up in the export statistics.

But there are complications to this picture that lead many to wonder if this impact is declining. First, one confounder of currency movements is what is called "pass through." Many exporters, especially those in consumer or retail areas, would rather eat adverse currency changes than lose market share to their competitors. They respond to a strengthening currency by cutting their prices. If this happens, the effect of the exchange rate is borne by the exporting company rather than by showing up as reduced exports. An interesting example here might be Tennessee's whiskey industry. This is a product sold to liquor wholesalers, ultimately for retail trade. It competes directly with other global whiskeys and liquors. If we look at a chart of the state's whiskey exports against the inverse of the state dollar index, we see an odd pattern.* Several years ago, exports did rise as the dollar fell, and then export growth flattened as the dollar's value stabilized. Yet over the past couple of years, as the value of the dollar has strengthened, global Tennessee whiskey sales have not fallen. Is this a case of pass through? Are the state's whiskey exporters reducing their price in preference to losing their exports?

A second complication is the impact of supply chains, which have grown dramatically in this century. Many large firms now move products between their own facilities in different countries or have long-term contracts with foreign affiliates and suppliers. Exports are not priced on the open market. These flows are thus much less affected by currency movements. Recent work by IMF researchers confirms that supply chains have reduced the global impact of currency changes on exports in recent years. A number of Tennessee exports, especially in the automotive and electronics sectors, are deeply embedded in supply chains. We have charted the export path of automotive exports. And yes, we see very little correlation with currency movements for this large export sector.

 

* We use an inverse index (which is simply the reverse of the index, it goes up when the dollar goes down) because it is easier to visualize. Exports should go up when the inverse index goes up and down when it goes down. Whiskey has a second odd pattern. Exports spike each fall as retailers load up for the holiday season.