The South Africa‐U.S. Trade and the Real Exchange Rate: Asymmetric Evidence from 25 Industries

• Published date: 01 June 2020
• Author: Abera Gelan,Mohsen Bahmani‐Oskooee
• DOI: http://doi.org/10.1111/saje.12242
• Date: 01 June 2020

© 2019 Economic Society of South Africa

South African Journal of Economics Vol. 88:2 June 2020

doi: 10.1111/saje.12242

186

THE SOUTH AFRICA-U.S. TRADE AND THE REAL

EXCHANGE RATE: ASYMMETRIC EVIDENCE FROM 25

INDUSTRIES

MOHSEN BAHMANI-OSKOOEE*,† AND ABERA GELAN‡

Abstract

Previous studies that assessed the effects of exchange rate changes on the trade balance of South

Africa assumed that the effects are symmetric. In this paper we violate that assumption and assess

the asymmetric effects of the real rand-dollar rate on the trade balance of 25 2-digit industries that

trade between South Africa and the U.S. We find short-run asymmetric effects in a total of 19

industries but short-run cumulative or impact asymmetric effects only on five industries. Short-

run asymmetric effects lasted into long-run asymmetric effects on 14 industries. Further analysis

revealed industries that will benefit from rand depreciation and those that will be hurt from rand

appreciation.

JEL Classification: F14, F31

Keywords: South Africa-U.S. trade, 25 industries, rand-dollar rate, asymmetry analysis

1. INTRODUCTION

An area in international economics that has received a great deal of attention is the link

between the real exchange rate and the trade balance, especially since 1973 when Magee

(1973) introduced the concept of the J-curve effect, i.e. the adverse effects of a deprecia-

tion in the short-run combined with its favourable effects in the long run (Rose and

Yellen, 1989).1 Indeed, advances in econometric theory has introduced a way of distin-

guishing the short-run effects from the long-run effects. In case no long-run effects is

discovered, the blame is shifted to the linear adjustment of the exchange rate. Once its

nonlinear adjustment is introduced, some significant effects are revealed. This is done

mostly by applying asymmetric error correction and asymmetric cointegration approach

of Shin et al. (2014). Regardless of the linear or nonlinear models, researchers have used

trade data at different levels of aggregation and showed that the more disaggregated the

1 The short-run deterioration in the trade balance is mostly argued to be due to adjustment lags

and currency contracts.

* Corresponding author: Mohsen Bahmani-Oskooee, The Center for Research in International

Economics and Department of Economics, The University of Wisconsin-Milwaukee, Milwaukee,

WI, USA. E-mail: bahmani@uwm.edu

† The Center for Research in International Economics and Department of Economics, The

University of Wisconsin-Milwaukee

‡ Department of Africology, University of Wisconsin-Milwaukee

Valuable comments of two anonymous referees are greatly appreciated. Any remaining error,

however, is our own.

South African Journal

of Economics

187South African Journal of Economics Vol. 88:2 June 2020

© 2019 Economic Society of South Africa

trade flows, the more support for the J-curve effect. Indeed, review papers by Bahmani-

Oskooee and Ratha (2004a) and Bahmani-Oskooee and Hegerty (2010) reveal that each

country has its own literature and since our country of concern in this paper is South

Africa, a brief review of the literature follows.

South African-related studies could be classified into three categories. The first cat-

egory includes studies that have used trade flows between South Africa and rest of the

world. The list includes Kamoto (2006), Bahmani-Oskooee and Gelan (2012), Schaling

and Kabundi (2014) and Matlasedi et al. (2015) who found that the real depreciation

of South African rand has favourable effects on its trade balance. However, Ziramba and

Chifamba (2014) who also used aggregate trade flows found no significant effect of a

rand depreciation on South Africa’s aggregate trade balance.

Suspecting that the above studies suffer from aggregation bias, studies in the second

category concentrate on using the trade flows between South Africa and some major

trading partners. The list includes Bahmani-Oskooee and Ratha (2004b) who investi-

gated the J-curve effect between the U.S. and each of its trading partners from developing

world including South Africa. Indeed, they found that a real depreciation of the U.S.

dollar against South African rand improves the U.S. trade balance with South Africa.

Due to symmetry assumption in their model, their finding also implies that a real de-

preciation of the rand will improve South African trade balance with the U.S. Moodley

(2011) is another study that considered South Africa’s bilateral trade balance with Brazil,

Russia, India and China. Only in the bilateral model with Russia, the exchange rate had

significant effects.

Studies in the second category are also said to suffer from aggregation bias in that

different industries that trade between South Africa and a trading partner could react

differently to a real depreciation of the rand. Indeed, when Chiloane et al. (2014) concen-

trated on the trade balance of only South African manufacturing sector with the rest of

the world, they found support for the J-curve effect in that sector. The approach was ex-

panded recently by Amusa and Fadiran (2019) who concentrated on South African trade

with its major trading partner, the U.S. and disaggregate their trade flows by industry. A

total of 21 industries were considered and they found that a real depreciation of rand has

favourable long-run effects on the trade balance of six industries which all together en-

gage in 27.62% of the trade. One large South African industry (Machinery with 22.18%

trade share) was one of the six industries.

All the studies reviewed above have one common feature in that they have all assumed

that the response of South African trade flows to changes in the value of rand is symmet-

ric. However, recent studies have argued and empirically demonstrated that exchange

rate changes could have asymmetric effects on the trade flows and eventually on the trade

balance. While Bahmani-Oskooee and Fariditavana (2015, 2016) emphasised change in

traders’ expectations when a currency depreciates vs. when it depreciates, Arize et al.

(2017) pointed out that it is possible that if firms do not exit the market during currency

appreciation, their export earnings will decline at a different rate than they would increase

when currency depreciates, hence asymmetric effects. Furthermore, there is evidence that

traded goods prices respond to exchange rate changes asymmetrically (Bussiere, 2013).

Clearly, if import and export prices respond to exchange rate changes asymmetrically, the

trade flows and eventually the trade balance will follow the suit.