The effects of exchange rate changes on sectoral foreign trade

This study investigates the effects of the changes in both exchange rate levels and volatility on both total manufacturing trade and sectoral exports and imports. Using a panel dataset from 55 developed and developing countries in 1990-2021 period, we analyze bilateral trade dynamics for total manufacturing and 20 subsectors. Initially, sectoral trade dynamics are examined in terms of export and import shares, technological intensity, and integration into global value chains. To determine the effects of exchange rates, the gravity model is estimated using the fixed effects method, and exchange rate sensitivity of sectoral trade is analyzed for both the entire period (1990-2021) and the sub-periods of 1990-2005 and 2006-2021. The findings indicate that real exchange rate appreciation reduces aggregate manufacturing exports and increases imports. However, the magnitude and direction of these effects vary significantly across sectors. In technology-intensive sectors and those with high foreign value-added content, the impact of real exchange rate appreciations becomes statistically insignificant or even reverses. Exchange rate volatility adversely affects exports in most sectors but shows no significant impact on imports. Our period-specific analysis results that during 1990-2005, the results align with the traditional Mundell-Fleming model, while the 2006-2021 period reveals a weakening or reversal of this relationship in many sectors. Moreover, exchange rate volatility had limited effects initially in the earlier period but exerted significantly negative impacts across all sectors in the latter period.