The Sensitivity of Export Quantities to
Exchange Rates in the Context of Intra-Industry Trade
Abstract
This paper adds to the literature that suggests that exports become less sensitive to exchange rate movements under certain circumstances. Focusing on the industry-specific sensitivity of export quantities to exchange rates in the context of intra-industry trade (IIT), this paper theoretically and empirically investigates this relationship. The model presented shows that the extent of bilateral IIT is higher the lower the elasticity of substitution between differentiated products and/or the smaller the gap in production costs between two countries. The empirical analysis investigates cross-country industry-panels for the bilateral trade of eight East Asian countries, Japan, and the United States with the EU, Asia, Japan, and North America. The results confirm that the sensitivity of export quantities to exchange rates declines as the extent of IIT increases. The policy implication of the results is that exchange rate revaluations become a less powerful tool to redress trade imbalances when substantial IIT exists.
