We ran two sets of experiments to **_115_** -X explore the sensitivity of trade flows to **_US_** _exports_ changes in exchange rates. The first - **_U_** _S imports_ sequence consists of five experiments, 110 ....... **_IND exports_** depreciating the US dollar in 5 percent steps **_IND imports_** to 25 percent. These experiments indicate **_1_** the impact of changes in the US exchange **_10s_** l rate alone. Figure I presents the results for . aggregate US real exports and imports, and **_100_** . . . also shows the effect on Indonesian exports **_._** and imports as well. For the US, for each percentage point real depreciation, real **_95,9_** exports increase and imports decrease by just under a half of a percentage point each. **_90_** Given a 25 percent depreciation, the net 9 trade balance for the US improves by almost _Base 5%_ **_10% 15% 20%_** $90 billion. The effect is roughly linear, _US_ **_depreciation_** amounting to an improvement of about $3.5 **Figure 1:** Real exports and imports, US and Indonesia billion in the balance of trade for each

|to<br>**_115_**-X|
|---|
|to<br>**_US_**_exports_|
|st<br>**_U_**<br>-<br>_Simports_<br> <br> <br>|
|ts,<br>110.......<br>**_INDexports_**<br> <br>|
|ps<br>**_INDimports_**<br>te<br>**_1_**|
|ge<br>**_10s_**l<br>|
|or<br>.|
|d<br>**_100_**<br>. . .|
|rts<br>**_._**<br>ch|
|al<br>**_95,9_**|
|<br>y<br>h.<br>**_90_**|
|et<br>9|
|<br>ost<br>_Base_<br>_5%_<br>**_10%_**<br>**_15%_**<br>**_20%_**<br>**25%**|
|<br>r,<br>_US_**_depreciation_**<br>.5**Figure 1:**Real exports and imports, US and Indonesia<br>ch<br>r countries to increase their imports and decrease their exports<br>r a 25 percent US depreciation, decreases exports and increase<br>the developing ASEAN countries is somewhat smaller, rangin<br>gure 1, a 25 percent real depreciation of the dollar leads to a 2.<br>ercent increase in real imports, worsening the balance of trade<br>**able 9: Bilateral Trade Balance Changes**|
|Change in net trade balance: ($US billions):|
|Region<br>US<br>Japan<br>Indonesia|
|Indonesia<br>0.18<br>-1.45<br>**-**|
|Thailand<br>0.73<br>-0.78<br>0.06|
|Philippines<br>0.41<br>-0.34<br>0.01|
|<br> <br> <br>**Singapore**<br>**&Malaysia**<br>**2.25**<br>**-1.84**<br>**0.17**|
|<br> <br> <br> <br><br>**China**<br>2.82<br>**-1.74**<br>**0.14**<br> <br> <br> <br>|
|**Korea & Taiwan**<br>**3.25**<br>**-2.53**<br>**0.24**|
|Japan<br>19.72<br>-<br>1.45|
|US<br>-<br>**-19.72**<br>**-0.18**|
|European Union<br>**10.17**<br>**-5.58**<br>**0.31**|
|<br>Rest of world<br>8.29<br>-2.61<br>0.46|
|**Total**<br>47.84<br>-36.30<br>2.66|

percentage point real depreciation.

A US real depreciation leads all other countries to increase their imports and decrease their exports. The effect is largest for Japan, which, for a 25 percent US depreciation, decreases exports and increases imports by 5 percent each. The effect for the developing ASEAN countries is somewhat smaller, ranging from 2-4 percent. For Indonesia, from Figure 1, a 25 percent real depreciation of the dollar leads to a 2.2 percent decline in real exports and a 2.3 percent increase in real imports, worsening the balance of trade.

In the second sequence of experi- **Table 9: Bilateral Trade Balance Changes** ments, we first specified a 10 percent US depreciation and, at the same time, a 10 percent appreciation of the Region US Japanese yen, while leaving other exchange rates unchanged. We then Indonesia 0.18 did two additional experiments in Thailand 0.73 which we assumed that Indonesia Philippines 0.41 depreciated 5 percent and lO percent **Singapore &Malaysia 2.25 China** 2.82 following the dollar down. Table 9 **Korea & Taiwan 3.25** shows the changes in the bilateral Japan 19.72 - trade flows for the US, Japan, and US - Indonesia from the third experiment European Union **10.17** in which Indonesia follows the US Rest of world 8.29 depreciation (thereby depreciating by **Total** 47.84 20 percent against the yen and 10 percent relative to other ASEAN Note: Results reported for Experiment 3; US **10** currencies).

Note: Results reported for Experiment 3; US **10** percent depreciation, Japan 10 percent appreciation, and Indonesia 10 percent depreciation. Trade balance equals exports minus imports.

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