U.S. trade will be affected more than China’s by fluctuations in real exchange rates as the world’s largest economy has a higher amount of intra-industry transactions, the Bank for International Settlements said.

 

“The sensitivity of the trade balance to movements in real exchange rates should be much lower in a country with a low level of intra-industry trade than in a country with high intra- industry trade,” the Basel, Switzerland-based BIS said in its Quarterly Review. “Its imports are unlikely to fall significantly following a real exchange-rate depreciation because no domestic industry can easily replace the imports that have become more expensive.”

 

Low intra-industry trade countries are typically those where raw materials or natural resources like oil account for a major share of imports or those that have specialized in particular industries in order to benefit from an inherent comparative advantage, the BIS said. Real exchange rates refer to the purchasing power of currencies relative to each other.

 

The U.S. could expect a larger reduction in its trade deficit from a depreciation in its exchange rate than China would experience from an appreciation, the BIS said.