In the second of a series of interviews with economics researchers at the Royal Economic Society Conference 2007, Romesh Vaitilingam talks to Richard Kneller about the effect of exchange rate movements on UK exports.
Changes in exchange rates have little impact on UK manufacturing exports and are likely to have only a modest effect in reducing the countrys record trade deficit, according to research by Dr Richard Kneller and colleagues, presented to the Royal Economic Society’s 2007 annual conference at the University of Warwick.
Dr Kneller said:
The findings may surprise many people intuitively you would expect a strong pound to be bad for exports and a weak pound to lead to much greater exports.
But this research shows a different picture. It means that those concerned about the size of the trade deficit should not see a devaluation of sterling as a magic bullet solution to closing the gap.
In the most comprehensive research of its kind carried out in the UK, the researchers analysed exchange rate movements and export patterns of over 23,000 UK manufacturing firms over a 17-year period from 1987 to 2004. They find that changes in exchange rates:
- make little difference to a firms decision to start or stop exporting;
- make no difference at all to the level of exports of multinational firms;
- and while making some difference to domestic UK firms, they have a modest impact on exports.
Dr. Kneller said:
Our research shows that a drop in the value of the pound will not suddenly persuade British manufacturers to get out their foreign phrase books and start trying to sell overseas.
He said the analysis also showed that changes in exchange rates make no difference to the level of exports of multinationals based in the UK:
It would appear that multinationals are better able to internalise and offset currency risks. In the last few years, there has been a huge amount of foreign direct investment in the UK, which means that multinationals now account for at least a third of total UK exports.
But the report shows that exchange rates do have some effect on individual domestic UK manufacturers. For every 1% increase in an exchange rate index, a firms exports will drop by 1.28%. Usually exchange rate indices change by between 3 and 10 index points in a year.
But Dr. Kneller said
You have to put this into context. On average, exports account for just 5.6% of a domestic UK manufacturers business so, on average, a 10 point change in the exchange rate index will make about half a percent difference to total sales for a firm.
Notes for editors: Exchange Rates and Exports: Evidence from Manufacturing Firms in the UK by David Greenaway, Richard Kneller and Xufei Zhang was presented at the Royal Economic Societys 2007 Annual Conference at the University of Warwick, 11-13 April.
The authors are at the Globalisation and Economic Policy Centre at the University of Nottingham.
The latest balance of trade figures from the Office of National Statistics show that in December 2006, the UK imported £7.1bn worth of goods more than it exported. Last year, the UKs deficit on goods and services rose to a record £55.8 billion for the year as a whole, compared with a deficit of £44.6 billion in the previous year.
For further information: contact Romesh Vaitilingam on 07768-661095 (email: firstname.lastname@example.org).
Find more papers by Richard Kneller at EconPapers and search Intute: Social Sciences for more Internet resources on exchange rates, exports and manufacturing. or get more economics updates at the Intute: Social Sciences blog.