By: Lora Mwaniki-Lyman (L. William Seidman Research Institute, ASU)
The U.S. dollar has appreciated significantly against other currencies since mid-2014. Countries whose currencies have depreciated substantially as a result include those categorized as emerging economies and commodity exporters. Mexico has seen its currency decline in value (depreciate) relative to the U.S. Dollar by 36 percent while the Canadian Dollar has depreciated by 23 percent since June 2014.
Conventional economic models imply that an appreciation in the U.S. Dollar (strong dollar) due to current account imbalances, policies effects or exogenous shocks, leads to an increase in imports as foreign-made consumer and intermediate goods (imports) become relatively cheaper to U.S. consumers. On the reverse side, U.S.-made consumer and intermediate goods (exports) become more expensive abroad, making them less attractive to foreign consumers, leading to a decline in exports.
A 2015 study by the International Monetary Fund (IMF) confirms that exchange rates still matter for trade. According to the study, a 10 percent real effective depreciation in an economy’s currency is associated with a rise in real net exports of an average 1.5 percent of Gross Domestic Product, with country-specific variations around the average. Most of the effect occurs in the first year and is greater in growing economies with sound financial systems. This should be good news for economies that are major importers to the United States. However, there is some positive effect for some U.S. exporters as well. The IMF study also revealed that the recent rise in cross country production-sharing and global value chains has weakened the effects of currency movements on trade in intermediate products. The study identifies the economies of Hungary, Mexico, Romania and Thailand as major players in the global value chain that benefit from this recent trend.
How do these findings translate to Arizona’s trade with its trading partners? Based on the IMF research, the large exchange rates movements should, at the aggregate level, have a weaker effect on U.S. and Arizona exports that are part of the U.S.-Mexico production-sharing and global supply chain.
According to the U.S. Census Bureau, Arizona merchandise exports to the world totaled $22.6 billion in 2015, an increase of 6.2 percent in nominal dollar value since 2014. Fifty percent of Arizona’s total exports were destined for U.S. NAFTA partners – Mexico ($9.2 billion) and Canada ($2.2 billion), with Mexico accounting for 81 percent of Arizona’s NAFTA export market share. Arizona merchandise exports to Mexico increased by 6.3 percent in nominal dollar value, or 26.8 percent in nominal pesos in 2015.
It is well known that Arizona’s trade-related economy is highly integrated with Mexico through its cross-border industry clusters that include manufacturing, fresh produce and tourism. Of the $9.2 billion in Arizona exports to Mexico in 2015, 66 percent were exports of manufacturing inputs and final goods. In addition, the share of manufacturing exports grew by 3.9 percent between 2014 and 2015.
This positive trends in Arizona merchandise exports to the rest of the world and to Mexico during a period of high U.S. dollar appreciation is in complete contrast to national level trends. In 2015, U.S. exports to the rest of the world and to Mexico declined by 7.2 percent and 1.6 percent respectively. The -7.2 percent drop in U.S. exports to the rest of the world is reported to be the largest decline in export value since the end of the 2007 recession. Arizona is the only U.S. border state to report an increase in exports to the rest of the world. New Mexico and Texas also reported an increase in exports to Mexico of 5.5 percent and 8.7 percent respectively. California reported a decline in exports to Mexico of 7.8 percent.
While the high economic integration between U.S. Border States and Mexico production facilities may be buffering the effects of recent U.S. dollar appreciation on Arizona exports to Mexico, and consequently to the rest of the world, it would be remiss not to give credit to the recent strategic efforts by state and local leaders in Arizona to strengthen business relationships between Arizona and Mexico. These efforts include the Arizona Trade and Investment Office in Mexico City, new leadership at the Arizona-Mexico Commission, recent relationship building trips to Mexico City and other regions in Mexico by Arizona leaders, the Arizona-Mexico memorandum on binational corridor developments that will include a multiyear Arizona-Mexico Corridor Study, MPEXA, and forums and tools such as connectbien.com that connect businesses in Arizona with businesses in Canada and Mexico.
Both domestic and international corporate executives assessing new market opportunities in Central and North America should highly consider the Arizona-Mexico global supply chain as a viable and competitive platform for their globally-oriented manufacturing activities.
 Federal Reserve Economic Data (FRED), Federal Reserve Bank of St. Louis.
 World Economic Outlook, Adjusting to Lower Commodity Prices. (2015, October). Exchange Rates and Trade Flows: Disconnected? Chapter 3. Retrieved from the International Monetary Fund website: https://www.imf.org/external/pubs/ft/weo/2015/02/pdf/c3.pdf accessed April 27, 2016.
 Exchange Rates Still Matter For Trade. (2015, September 28). International Monetary Fund Survey. Retrieved from the International Monetary Fund website: http://www.imf.org/external/pubs/ft/survey/so/2015/RES092815B.htm
 USA Trade Online, United States Census Bureau.
 Trade Map – International Trade Administration, U.S. Department of Commerce. Source: http://www.trademap.org/tradestat/index.aspx
About the Author:
Lora Mwaniki-Lyman is a Senior Research Economist with the Seidman Research Institute at the W. P. Carey School of Business at Arizona State University. She has significant research experience in international trade and investment, border economies, markets and industry clusters, economic impacts and policy analyses. She may be reached at (480)-965-5362 or via email at Lora-Mwaniki-Lyman@asu.edu.