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Exchange Rates and Tax-Based Export Promotion

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  • Mihir A. Desai
  • James R. Hines Jr.

Abstract

This paper examines the impact of tax-based export promotion on exchange rates and patterns of trade. The threatened removal of Foreign Sales Corporations (FSCs) due to the 1997 European Union complaint before the World Trade Organization (WTO) is used to identify the adjustment of exchange rates to reduced after-tax margins for American exporters. The evidence indicates that days associated with significant developments in the European complaint are characterized by predicted changes in the value of the U.S. dollar. Additionally, foreign trading relationships with the United States appear to influence currency responses to the possibility of FSC repeal. Exchange rate movements on the date of the initial European complaint indicate that 10 percent greater net trade deficits with the United States are associated with currency appreciations of 0.2 percent against the U.S. dollar. This evidence is consistent with a combination of trade-based exchange rate determination and important effects of U.S. export promotion policies.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8121.

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Date of creation: Feb 2001
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Publication status: published as Proceedings of the 93rd Annual Conference on Taxation. National Tax Association: Washington D.C., 2001.
Handle: RePEc:nbr:nberwo:8121

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  1. Donald J. Rousslang & Stephen P. Tokarick, 1994. "The Trade and Welfare Consequences of U.S. Export-Enhancing Tax Provisions," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 675-683, December.
  2. Subramanian Rangan & Robert Z. Lawrence, 1993. "The Responses of U.S. Firms to Exchange Rate Fluctuations: Piercing the Corporate Veil," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 341-379.
  3. Maurice Obstfeld & Kenneth Rogoff & Ben Bernanke & Kenneth Rogoff, . "The Six Major Puzzles in International Macroeconomics: Is there a Common Cause?," Working Paper 32326, Harvard University OpenScholar.
  4. Sawyer, W. Charles & Sprinkle, Richard L., 1997. "The Demand for Imports and Exports in Japan: A Survey," Journal of the Japanese and International Economies, Elsevier, vol. 11(2), pages 247-259, June.
  5. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
  6. John Mutti & Harry Grubert, 1984. "The Domestic International Sales Corporation and Its Effects," NBER Chapters, in: The Structure and Evolution of Recent U.S. Trade Policy, pages 279-320 National Bureau of Economic Research, Inc.
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Cited by:
  1. Desai, Mihir A. & Hines Jr., James R., 2008. "Market reactions to export subsidies," Journal of International Economics, Elsevier, vol. 74(2), pages 459-474, March.
  2. Lederman, Daniel & Olarreaga, Marcelo & Payton, Lucy, 2006. "Export Promotion Agencies: What Works and What Doesn't," CEPR Discussion Papers 5810, C.E.P.R. Discussion Papers.

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