In this blog we discussed several times the reasons why exchange rate depreciation is not necessarily a panacea for current account problems (see for example here and here on Argentina depreciation before the last one with the Macri administration, here on the Europe, here in general about the idea of a Sustainable and Stable Competitive Real Exchange Rate or SSCRER, and here on the role of the exit from the Gold Standard during the Depression). Exchange rate skepticism suggested that depreciation often works because it is contractionary, and it worked by causing a recession and reduced imports. The optimists, like the so-called New Developmentalists pointed out to the positive impact on exports.
"An obvious reason for the low explanatory power of price competitiveness is that a large part of trade involves intermediates products – i.e. inputs used within rather well established global value chains (GVCs) – and is thus far less influenced by pure exchange rate considerations."That is the steady increase in Chinese global export shares have less to do with their currency manipulation (something briefly discussed here) and more to do with the strategic decisions of firms on where to locate their supply chains. The authors conclude:
"By disentangling the impact of exchange rate changes on trade results, we have shown that the underlying assumption of the ‘currency wars’ discussion – that devaluations bring about substantial export gains – may be severely flawed."
The evidence seems to suggest that depreciation does not stimulate the type of substitution that would lead to external equilibrium, neither on the import or export side, and that a devalued currency is no substitute for industrial policy. Of course evidence, once John Eatwell noticed, has not solved any economic debate so far.