VoxEU Column Exchange Rates

Beggar-thy-neighbours? Spillover effects of exchange rates

Do exchange rate movements in one country affect its competitors? This column suggests that a 10% appreciation of the renminbi increases other developing countries’ exports by about 2%. Where competition with China is especially intense, the increase could be as large as 6%. The results imply that an appreciation of the renminbi could provide a boost to developing country exports.

Nearly all of the empirical research on exchange rates is focused on the impact of their changes on the country experiencing or undertaking them. This is true of the older, voluminous literature on the trade consequences of exchange rates (surveyed in Goldstein and Khan 1985), as well as more recent contributions like Rodrik (2008) and Berman et al. (2012). There is less evidence quantifying the effect of exchange rate movements on the exports of competitor countries, a classic case of spillover that, in its adverse manifestation, is dubbed the “beggar-thy-neighbour” effect.

In recent research (Mattoo et al. 2012), we examine the spillover effect of movements in China’s exchange rate on exports of other developing countries in third country markets. The Chinese currency provides a suitable opportunity to study the spillover dimension for three reasons. China, by virtue of being the world’s largest exporter of goods, is likely to have quantitatively more significant competitive consequences for other countries than nearly any other exporter. Second, China is also a highly diversified exporter so it potentially competes with a broad range of countries and across the product spectrum. Finally, reflecting China’s dominant size and encompassing scope, its exchange rate policy has been one of the most controversial aspects of international macroeconomics during the 2000s. More recently, it has been in the spotlight because of the consequences of a possibly undervalued renminbi on demand and output in industrial countries experiencing high unemployment and excess capacity.

Research design

The spillover effect is estimated with the help of highly disaggregated trade data which facilitates the use of a novel methodology to exploit the variation across exporters, importers, products, and time. We use disaggregated trade data at the 6-digit level, spanning 124 developing country exporters and 57 large importers over the period 2000-8. Our empirical approach is motivated by an analytical framework that we develop based on Feenstra et al. (2011) and can be summarised as follows. Take two countries – Malawi and Brazil. Assume that Brazil faces a greater degree of competition with China in the US market for a particular product. When the renminbi depreciates vis-à-vis the dollar, exports from Brazil to the US for that product will fall more than exports from Malawi to the US (Figure 1).

Figure 1. Identification strategy

We develop indices of competition between China and its competing exporting countries at the exporter-importer-product level to implement this strategy. The empirical specification, with a battery of very general fixed effects that control for a wide range of observable and unobservable characteristics, helps us overcome to a large extent the problems of omitted variables that plague estimation of trade-exchange rate equations using aggregated data. Moreover, our estimates are less susceptible to reverse causality concerns (as discussed in Engel 2009) because exports measured at a disaggregated level are unlikely to affect a macroeconomic variable like the exchange rate, especially when the latter is the exchange rate of another country (China).


We find robust evidence for the existence of a statistically and economically significant spillover effect. In particular, exports to third markets of countries with a greater degree of competition with China tend to rise significantly more as the renminbi appreciates. Our estimates suggest that a 10% appreciation of the renminbi increases a developing country’s exports at the product level on average by about 1.5%-2%. Where competition between a developing country and China is especially intense, the increase could be as large as 6%. The results imply that going forward, an appreciation of the renminbi could provide a substantial boost to developing country exports. Our spillover estimates are robust to a variety of statistical tests, to alternative measures of exchange rates, to alternative disaggregation of the trade data, and also across exporting and importing regions. They are also robust to incorporating the effect of competition from countries (other than China) whose currencies move with the renminbi.

We also find that the spillover effect is greater for homogenous products with greater substitution possibilities than for differentiated products. Interestingly, the spillover effect is attenuated for products that rely more on foreign inputs (and hence have a lower degree of Chinese domestic value-added). The greater the reliance on foreign inputs (i.e. the lower the domestic value-added), the more an exchange rate depreciation increases input costs and hence dampens the competitive advantage from the depreciation. In other words, a greater reliance on foreign inputs is analytically analogous to a lower pass-through which dampens the spillover effect. But our results suggest that the special character of China’s trade, as reflected in its reliance on imported intermediates (noted by Koopman et al. 2012), does not eliminate this spillover effect, which remains quantitatively substantial.

Caveats and implications

Our paper identifies precisely and in a robust way a very specific mechanism of influence from exchange rates to trade – the “spillover effect” of Chinese exchange rate movements on exports of competitor countries to third markets. There could be other beneficial effects on developing country exports to China which we do not measure. For example, a depreciation of the renminbi could increase developing country exports of raw materials and intermediate goods to China for use in the production of China’s exports to third countries. Similarly, if China’s depreciation boosts its own growth, that could increase its demand for all goods and services, which could also lead to greater developing country exports. Thus, the effect of China’s exchange rate on overall exports of other countries remains an open question. Finally, we have not directly estimated any effects of China’s exchange rate movements on its own exports. Further research is needed to identify precisely all these other effects.

Subject to these important caveats, our findings may have a number of important policy implications. Hitherto, discussions of China’s exchange rate have been viewed through a global-imbalance perspective that has pitted current-account deficit countries (mainly the US) against surplus countries (mainly China). This paper suggests that this perspective may be too narrow because the effects of exchange rate changes can be broader and unrelated to such imbalances. In particular, China’s exchange rate changes affect other developing countries competing with China. If these exchange rate movements (or the lack thereof) stem from policy actions, there may be implications for the multilateral system. Since we have found that the resulting spillover effects are significant, one country’s policies can then potentially have substantial export implications for other countries. There may then even be a case for addressing policies creating exchange rate spillovers through multilateral cooperation (Mattoo and Subramanian 2009).


Berman, N, P Martin and T Mayer (2012), "How do different exporters react to exchange rate changes? Theory, empirics and aggregate implications," Quarterly Journal of Economics, 127(1), 437-492.
Engel, C (2009), “Exchange Rate Policies.” Federal Reserve Bank of Dallas Staff Paper.
Feenstra, R C, M Obstfeld, and K N Russ (2011), “In Search of the Armington Elasticity,” mimeo, UC Berkeley and UC Davis.
Goldstein, M and M S Khan (1985), "Income and Price Effects in Foreign Trade", in R W Jones and P B Kenen, (eds), Handbook of International Economics, vol. 2. Amsterdam: North-Holland.
Koopman, R, Z Wang and S-J Wei (2012), “How much of Chinese exports is really made in China,” Journal of Development Economics, forthcoming.
Mattoo, A, P Mishra and A Subramanian (2012), “Spillover Effects of Exchange Rates: A Study of the Renminbi,” Peterson Institute of International Economics Working Paper 12-4, World Bank Policy Research Working Paper 5989, and forthcoming as an IMF Working Paper.
Mattoo, A, and A Subramanian (2009), “Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade Organization", World Economy 32, 1135-1164.
Rodrik, D (2008), “The Real Exchange Rate and Economic Growth,” Brookings Papers on Economic Activity 2, 365–412.

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