The impact of exchange rate volatility on international trade between South Africa, China and USA : the case of the manufacturing sector

M.Com. (Financial Economics)The main objective of this mini dissertation is to examine the effect of exchange rate volatility on international trade. The finding of this mini dissertation is however that the impact of exchange rate volatility on international trade could be either positive or negative depending on various reasons that will be discussed when the arguments of the theorists that have either found a positive, negative and sometimes indeterminate effect of exchange rate volatility on international trade are discussed. The focus of this mini dissertation will be on the manufacturing trade between the Republic of South Africa with the United States and China. The need for an analysis of exchange rate volatility on international trade arises from the fact that firstly no consensus has been reached on the true effect of exchange rate volatility on international trade and secondly knowledge of what the true effect of exchange rate volatility is on international trade could assist in drafting the appropriate policies at government level. The finding of this mini dissertation represents a challenge for policy recommendations as it reflects the fact that various industries, sectors and subsectors of the economy of the Republic of South Africa are impacted differently by the volatility of the Rand/Yuan and Rand/Dollar exchange rates, respectively, therefore any policy that is drawn up to improve international trade needs to be done on an individual basis for each industry, sector and subsector respectively taking into account the various dynamics and characteristics of each. Firstly in the literature review a detailed discussion of both sides of the exchange rate volatility debate will be outlined. It would be shown why there is a lack of consensus when it comes to the issue of what effect exchange rate volatility has on international trade. On the one hand the argument of those suggest that exchange rate volatility hampers international trade or has a negative effect on international trade, such as Sekantsi, (2008); Onafowora and Owoye, (2008); Chit, (2010); Vergil, (2008); Arize et al, (2000); Arize and Malindretos, (2002); Klaasen, (2004) and Doganlar, (2002), will be reviewed. The argument of those that say that in fact exchange rate volatility has no impact on international trade, such as Raddatz, (2008); Frankel, (2007); Arize and Malindretos, (2002); Arize et al, (2000); Klaasen, (2004); Chowdhury, (1993) and Hassan and Sukar, (1999), will also be reviewed. This discussion and the results that arise from exploring this debate have very important implications on the recommendations that are passed on to government to be considered when drafting policies, such as the New Growth Path (NGP). Secondly when the background of the manufacturing industry in South Africa is discussed, all the initiatives and policies such as the NGP that government has planned and put in place in order to rejuvenate the manufacturing industry will be outlined. The impact of exchange rate volatility on international trade has a direct impact on these policies. Recommendations regarding how best enhance the policies to rejuvenate the manufacturing industry cannot be possibly made when consensus about the impact of exchange rate volatility has not be reached. For this reason it was it imperative that the true impact of exchange rate volatility on international trade be made clear