IMF: Currency Still Matters for Trade

By Taylor Garland
Sep 28 2015 |
Since January 2014, the Yuan has depreciated by 5.01 percent. According to the new IMF findings, that would mean a .75 percent boost to China’s GDP through cheaper exports.

A weaker currency gives a tangible boost to exports.

A weak currency has a noticeable, positive impact on a country’s exports, according to new research published on Monday by the International Monetary Fund (IMF).

“We find that, on average, a 10 percent real effective exchange rate depreciation comes with a rise in real net exports of 1.5 percent of GDP,” said Daniel Leigh, Deputy Division Chief in the Research Department, and lead author of the report.

The study finds little sign of a breakdown in the relationship between exchange rates and exports and imports.

After significant devaluations over the past few months, namely China in August, many economists argued that exchange rates matter less for trade due to the globalization of supply chains.

But the IMF report directly refutes this thinking, stating: “The study also finds little sign of a breakdown in the relationship between exchange rates and exports and imports.”

Nothing in this IMF report is news to China and other countries who have taken their lead from the world’s second largest economy. Currency devaluations in China, Japan and Europe all impact U.S. manufacturing, by making domestic imports artificially cheaper.

A weak currency has a noticeable, positive impact on a country’s exports.

“The research bolsters the IMF's call for countries to undertake deep structural reforms to boost economic output rather than relying on quick fixes,” reports Reuters’ Krista Hughes. “A message likely to be hammered home at IMF and World Bank meetings in Peru next week.”

We’ve said it before and we’ll say it again: Currency manipulation is the largest barrier to 21st century trade.