Does Currency Devaluation Really Improve the Export Sector?
It is a near-unquestioned assumption of mainstream economic thought, that if a currency is devalued, the country suffering from the devaluation sees some benefits – namely that the export sector will see an improvement.
Why? It is said that this happens because exports become cheaper to nations dealing in foreign currencies, and imports become dearer, making the purchase of goods from abroad for a country’s citizens more expensive.
This part is true. If the value of the dollar goes down, ceteris paribus, then everything purchased from abroad becomes more expensive, because now more dollars are required to buy the same amount of foreign-made goods. At the same time, since dollars are worth less, foreigners buying American-made goods with their own currency can now buy the same goods for less; i.e. their foreign currency “goes further” than before.
Here’s where the mainstream economists stop thinking, and conclude that therefore, the export sector benefits because exported goods now have a competitive edge.
Shouldn’t have stopped thinking just yet.
Reason inflation doesn’t help exports No. 1
Unless the exporting company imports none of the inputs required to produce its goods, which in a globalized economy is nearly impossible to achieve, then the above rule applies equally to them, too.
Meaning that a company producing goods for export must now face more expensive material costs, and simultaneously lower real sales prices. Think about it: the costs of their inputs have just gone up, and the value of their outputs has fallen. In other words, their profit margin is getting squeezed from both ends.
The conclusion? Rather than manufacture goods in America for export to other countries, the businessmen will either move their factories abroad, or lose their profits and their competitive edge.
Reason inflation doesn’t help exports No. 2
If a business really wanted a competitive edge, it would lower its own prices, as they so often do. If the fall in real prices to foreigners is caused by devaluation, then it is not a voluntary method of competition, but rather them being forced to cut back on their profits thanks to government action.
This is why the trade deficit is most readily rectified during a major recession – even though its a deflationary period.
Despite these very simple theoretical failings, the mainstream economic dogma about inflation boosting the export industry continues, both in classrooms and in the news. They even have a name for it: “competitive devaluation”.
Now you know its bunk. And it continues to be propagated for political reasons – the government and the central bankers need a justification for their actions, which would in any other circumstances be viewed plainly as counterfeit and stealthy theft.
The key to a strong export sector is to not mess around with the currency, not burden businesses with regulations, and not steal money from them through taxation. Then there will be plenty of exports, and plenty of jobs.