Exchange rate movements, export sophistication and direction of trade: The development channel and North–South trade flows

Abstract

We study the effects of real exchange rate (RER) changes on trade flows considering the skill content and origin/destination of products in a North–South framework. The empirical analysis is based on bilateral trade flows in five product categories of technology-and-skill intensities between 172 countries during 1962–2012. Consistent with the development channel, we find that both the composition and direction of trade affect how exports respond to RER changes.We find that high-skill manufactures and primary goods are the least affected from RER depreciation and volatility. The strongest effects are found for medium-skill, low-skill and resource-intensive manufactures. We also show that these effects depend on the direction of trade. Southern exports are more sensitive to RER than Northern exports in all product categories except for primary goods. Regarding volatility, South–North exports are hurt the most while North–South the least. Also, South–South exports appear to be less sensitive to volatility in all product groups than South–North. Overall, this paper provides a synthesis of the recent neoclassical international trade literature with the heterodox development literature.