Does the Value of the Dollar Affect Tennessee Exports? 2017
Tables and Graphs
Does a rising dollar create a more difficult environment for selling goods overseas?
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.
The similarity of the whiskey and automotive charts, however, shows us that it is not always easy to tell what's going on. (If you look closely, though, you will see a difference between the two. Whiskey seemed to react to the dollar when it fell but less so when it rose. Automotive exports show no connection in either direction.) A third confounder, by the way, is the competitiveness of an export sector. Competitive companies can squeeze out efficiencies and rely on superior products or service to help offset adverse price movements. In this regard, it's interesting to look at a chart comparing the global imports of the kinds of goods Tennessee exports to the state's actual exports of those goods. Over the past several years, Tennessee exports have held their own even while the global market has declined. In other words, Tennessee exporters have taken market share from other global exporters. This might be taken as a sign that state companies are relatively competitive, enabling them to offset the more difficult market they are in.
Of course, we shouldn't confuse relatively strong export performance with an argument that the value of the dollar doesn't matter. A cheaper dollar might well have led to even more trade than actually took place!
This complicated picture makes us wonder how big the impact of a changing dollar might be on Tennessee exports today. Exports from a particular location depend, in theory, mostly on three things: global demand for the product, the price offered by local exporters, and the general competitiveness of local exporters. From this, we built a model of Tennessee monthly exports. (The performance of the model can be seen in the charts.) We extract from it the estimated impact of a rising (or falling) dollar on state exports.
We found, as expected, that the biggest impact of a change in the value of the dollar comes some months after it occurs. A one percent rise in the dollar produces around a $16 million dollar drop in exports one year later. (Recall that May 2017 exports were about $2.88 billion.) That's a one-half percent drop in exports, which, while hardly dramatic, is also nothing to sneeze at. Two years later, the impact reaches its highest level. A one percent rise in the dollar leads exports to fall by around $23 million, a 0.8 percent drop. This is all a bit simplified because, for example, what would happen if the dollar went down a percent two years ago but up a percent last year? We would expect exports to be reduced by about $7 million, and so forth. The actual impact on any one month's exports is going to be an accumulation of dollar changes over time and how long ago they occurred.
The monthly numbers look small, but they are more impressive at an annual level. The impact on state exports of a steady rise of the dollar could run into several hundred million dollars. This effect will vary by industry. But overall we can see why people pay attention to trade-weighted dollar indices. The value of the dollar matters.
