Currency wars have been often cited as a policy trade off when signing a trade agreement. At the same time the world is evolving into Global Value Chains with every country engaged in different levels of production and trade integration.
So how do the trade agreements and exchange rate shocks interact at the times of unprecedented levels of trade integration?
This paper suggests that for 138 countries, which have been involved in regional trade integration through signing regional trade agreements (RTAs) since 1990, the burden of the trade balance adjustment to exchange rate changes is shifted towards the less integrated trading partners.
A 10 per cent depreciation towards non-RTA trading partners results in a 4.4 per cent improvement of the aggregate trade balance, while it could shrink it by 3.7 per cent with depreciation against RTA partners.
This research indicates that regional trade integration in the form of RTA should be taken into account in questions related to competitive exchange rate effects and trade balance adjustments.
The UNCTAD Research Seminar Series provides a platform for staff to present their work, receive feedback from colleagues, and gain exposure to research taking place outside the house that is relevant for UNCTAD and its mandate.
By Maria Sokolova, UNCTAD
