Invoicing Currency and Symmetric Pass-Through of Exchange Rates and Tariffs: Evidence from Malawian Imports from the EU

Angella Faith Montfaucon

doi:10.1016/j.inteco.2021.12.005

Abstract

The response of import prices to exchange rates can be used to predict the effect of changes in trade policy, as the symmetric hypothesis asserts that the effect of tariffs and exchange rates on prices are identical. This paper examines whether the hypothesis holds in the context of various invoicing currencies, using transaction-level data of Malawian imports from the European Union (EU). The findings show that the U.S. dollar has the highest invoicing share, and the pass-through of exchange rate and tariff shocks on importers is high, but not necessarily equal, when the currency of invoicing is considered. Crucially, the tariff pass-through to prices is higher than the exchange rate pass-through, with important differences across countries, currencies and sectors. Thus, in order to predict the effects of trade policy, bilateral exchange rates may not be suitable for capturing exchange rate pass-through for small developing countries, especially import-dependent ones such as Malawi.

Highlights

Trade prices are a principal channel through which movements in the exchange rate and changes in trade policy affect domestic variables for an open economy
Using highly disaggregated customs level data, this paper provides, to my knowledge, the first empirical evidence on the role of invoicing currencies in both exchange rate and tariff pass-through to import prices for a developing country
The results show that, on average, the pass-through rate of exchange rate and tariff shocks on to Malawian consumers is high with some variations across products, countries and invoicing currencies

Summary

Introduction

Trade prices are a principal channel through which movements in the exchange rate and changes in trade policy affect domestic variables for an open economy. Symmetric passthrough of tariffs and exchange rates to prices could allow the response of import prices to exchange rates to be used to predict the effect of changes in tariffs (Feenstra, 1989). This can be useful in the analysis of trade policy. An increase in tariffs may lead foreign exporters to that country to lower prices and the tariff is less than fully passed through in prices, and the importing country experiences a terms-of-trade gain These issues are of particular relevance to developing economies given that most trade takes place in the U.S dollar, they have relatively higher tariffs, and they are subject to relatively larger exchange rate changes

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Conclusion