The J-Curve Hypothesis: Evidence from Commodity Trade Between South Africa and the United States

Abstract

Previous studies on the J-curve hypothesis for South Africa have relied on aggregate trade data between South Africa and the rest of the world, or on similar data for trade between South Africa and its major trading partners. The evidence of J-curve effects in South Africa's bilateral trade have been mixed. In this paper, we revisit this issue by examining the short- and long-run effects of exchange-rate changes on trade flows using disaggregated industry data on bilateral trade between South Africa and the United States. From estimates of trade balance models using the autoregressive distributed lag (ARDL) approach, we find evidence of significant J-curve effects, as a depreciation of the South African currency has favourable short-run effects on trade balances for eight industries. These short-run effects continue into the long run for a quarter of the industries considered in the study. The results also show that income has significant long-run effects on trade flows in industries that account for almost 55% of trade flows between South Africa and the United States.

Notes

1 For a detailed discussion of this hypothesis, see Bahmani-Oskooee (1986).

2 The empirical results were generated from estimations carried out with Stata 14.

3 For both tests, the null hypothesis is that the variable contains a unit root, with the alternative that the variable follows a stationary process. In the tests, we include both constant and trend terms and employ the SIC for the optimal lag order in the ADF test equation. The test results indicate that the trade balance for three industries/commodities - vegetables, prepared foodstuffs and raw hides and leather - are stationary in levels. The full set of unit root tests for the variables employed in the empirical analysis is available from the authors upon request.

4 The codes relate to the HS classification for trade in mineral products, stone and glass and photographic and medical equipment.

5 The codes relate to the HS classification for trade in live animals, prepared foodstuff, textiles, toys and sports apparel, and works of art.

6 The ML condition states that, for a devaluation of domestic currency to improve a country's trade balance or balance of payments, the sum of the price elasticities of demand for exports and imports must be greater than one.

7 The codes denote the HS classification for trade in the following industries: live animals, vegetables, plastics & rubber, wood products, wood pulp & paper, textiles, precious metal, iron & steel, machinery, and works of art.