The Chains That Bind: Economic Interdependence and Currency Conflict
Since the height of currency manipulation amongst manufacturing exporters in the mid-aughts, currency manipulation as a strategy for export-led growth has declined. Between 2000 and 2012, eight exporting countries engaged in the practice, spending over $1 billion per day in foreign exchange intervention. By 2018, however, no currency manipulators remained. What explains the disappearance of currency manipulation as a viable, political strategy for export-led growth? In this book, I show that the cross-border trade of intermediate inputs decreases the political and economic benefits of running a depreciated currency, while the costs remain high. I argue that further global value chain integration acts as a bulwark against currency conflicts. I support the quantitative analyses, which utilize cross-sectional and survey data, with case studies in Europe and East Asia. At a time when Western governments are putting up trade barriers to stifle competition and promote domestic production, the book suggests a return to the very neo-mercantilist currency practices the West seeks to stifle. This suggestion is all the more palpable as countries incentive firms to reshore parts of their supply chains in response to the Covid-19 pandemic.
Peer-Reviewed Publications [Google Scholar]
Ryan Weldzius. 2021. The End of Currency Manipulation? Global Production Networks and Exchange Rate Outcomes. Economics and Politics 33(3): 514-32.
Between 2000 and 2017, eight major exporting countries engaged in currency manipulation in order to increase their trade surpluses with the rest of the world. As of 2018, however, no country continued to manipulate its currency. This change in policy is puzzling given the past successes of this export-led growth model. I argue that the state-level decision to stop depreciating its exchange rate stems from the reduced benefits and increased costs of currency manipulation. As production becomes more global, the increase in traded inputs decreases the traditional benefits of a depreciated currency, in particular, an increase in exports. Utilizing panel data across 70+ states between 2000 and 2018, I demonstrate that global production networks moderate the traditional relationship between export-dependence and currency manipulation. I further discuss how this relationship may reverse given the reshoring of production networks in response to the novel coronavirus pandemic.
Lauren Peritz, Ryan Weldzius, Ronald Rogowski, and Thomas Flaherty. 2021. Enduring the Great Recession: Economic Integration in the European Union. Review of International Organizations: 1-29.
Scholars have long feared that regional economic specialization, fostered by freer trade, would make the European Union vulnerable to economic downturn. The most acute concerns have been over the adoption of the common currency: by adopting the euro, countries renounce their ability to meet an asymmetric shock with independent revaluations of their currencies. We systematically test the prediction that regional specialization increases vulnerability to economic downturn using a novel dataset that covers all of the EU’s subnational regions and major sectors of the economy between 2000 and 2013. We find that, contrary to conventional wisdom, the most specialized regions actually fared better during the 2008-09 global financial crisis. Specialized regions performed worse only in states that remained outside the Eurozone. The heightened vulnerability of non-Eurozone states cannot be attributed to fiscal or social policy failures. Rather, our results suggest the common currency may have helped Eurozone members share risk. This bodes well for the resiliency of the EU, even as it navigates another economic downturn from the asymmetric impact of the novel coronavirus.
Jennifer Ifft, Deepak Rajagopal, and Ryan Weldzius. 2019. Ethanol Plant Location and Land Use: A Case Study of the Conservation Reserve Program and Ethanol Mandate. Applied Economic Perspectives and Policy 41(1): 37-55.
This study uses a county-level difference-in-difference framework to estimate the share of re-enrollment into the Conservation Reserve Program (CRP) in response to local ethanol production capacity after the Renewable Fuels Standard (RFS). Relatively more land remained in CRP in ethanol-intensive areas after the RFS. This seemingly counter-intuitive result can be explained by post-RFS changes to the CRP that favored ethanol-intensive areas. Both CRP design changes and production trends correlated with ethanol plant location pose challenges for empirical strategies that use ethanol plant location to study production or land use decisions. Changes to CRP policies can play an important role in participation and land use decisions.
Ryan Weldzius. 2019. Review of Currency Statecraft: Monetary Rivalry and Geopolitical Ambition, by Benjamin J. Cohen. Perspectives on Politics 17(3): 945-6.
World Trade Report 2014 - Trade and Development: Recent Trends and the Role of the WTO. Geneva: World Trade Organization.
Working Papers & Works in Progress
Ryan Weldzius, James R. Vreeland, and James Bisbee. 2021. Political Cleavages and Exposure to the Global Financial Crisis. (submitted)
Can a financial crisis tip the domestic balance of power between the winners and losers of globalization? In this paper, we trace that roots of contemporary elite polarization in American politics to the differential impact of the 2008 global financial crisis. We examine firms’ corporate campaign contributions and lobbying expenditures before and after the financial crisis, finding that firms more insulated from the crisis experience a relative increase in their political expenditure profiles. We then identify the recipients of these expenditures, tracing the inversion of political capital to the proliferation of less mainstream candidates in federal elections. Our findings provide a causal mechanism through which elite polarization has grown in American politics: exposure to the global financial crisis caused a shift in political capital from the incumbent winners from globalization to anti-globalization challengers.
Abigail Vaughn and Ryan Weldzius. Re-shoring Global Supply Chains.
The COVID-19 lockdowns caused myriad disruptions in international trade, leaving strategically important industries vulnerable to a break in their global supply chains. Despite a decade-long retreat from globalization, only three governments allocated funds to re-shore these vulnerable supply chains—Japan, South Korea, and the United States. What explains these governments’ decision to prioritize the re-shoring of vulnerable supply chains while other governments chose to maintain the status quo? We argue that a home government will allocate funds to incentive the re-shoring of foreign production from a country if (1) the home country is highly dependent on the foreign country for inputs, (2) the home government has a high level of distrust for this foreign government, and (3) the inputs are of strategic national importance. We test this argument using a comparative case study, matching cases on observable covariates. We find that home governments are more likely to allocate funds for high research and development sectors if the sector is dependent on an adversarial trading partner, but home governments are less likely to incentivize the re-shoring of vulnerable supply chains if the bilateral strategic relationship is strong.
Ryan Weldzius. Predicting Revealed Trade Preferences: A Factor Content Approach.
The field of international political economy has relied upon the Heckscher-Ohlin model of factor endowments to predict individual trade-policy preferences for several decades. However, prior work in the field of economics has shown that a country’s factor endowment only correctly predicts the direction of trade 50% of the time. In this paper I include a critical assumption from the Heckscher-Ohlin model in my empirical strategy, which provides a better fit to the data than all prior studies on individual trade preferences. Instead of assuming that the abundant factor in an economy is used intensively in the production of export goods, I include the factor intensity and the direction of trade for each individual’s industry of employment. I show that this factor content of trade approach better fits the data than a simple factor endowment approach. Moreover, although low-skilled labor exhibits consistent anti-trade preferences, the individual preferences of high-skilled labor depends largely upon the factor intensity of the individual’s industry of employment.
Nils Gudat and Ryan Weldzius. The (Anti-)Competitive Effects of Trade Liberalization in North America.
Trade liberalization, scholars have long recognized, improves the general welfare of an economy by increasing consumption opportunities due to increased competition. In the long term, however, as firms become more productive and squeeze smaller firms out of the marketplace, trade liberalization may actually have anti-competitive effects, and these effects may be endogenous to the politics of trade liberalization. This paper tests predictions on the behavior of aggregate prices and productivity in response to trade liberalization derived from the Melitz and Ottaviano (2008) model of international trade with heterogeneous firms. The model's equilibrium conditions for the short- and long-run distribution of the aggregate variables are amended to yield regression equations that identify the effects of tariffs and trade openness on domestic competition in the marketplace. Model predictions on the effects of third-country openness to trade are also tested and information on industry market structure is used to separately test the model's short- and long-run predictions. Our framework is estimated on a data set covering 64 manufacturing industries in the NAFTA member countries Canada, Mexico and the USA from 1988 to 2008. Consistent with the theoretical predictions, we find that in the short-term there are competitive effects of trade openness on prices and productivity, whereas in the long-term some of these effects are reversed. Third-country effects, however, run contrary to theoretical predictions and direct tests of short- and long-run industry reactions remain inconclusive. We posit these mixed, long-term outcomes stem from Chinese import penetration, as well as the endogeneity of trade liberalization lobbying efforts.
Ryan Weldzius. Regional Monetary Policy Convergence.
The current absence of currency conflict between many export-dependent states is puzzling given the success of competitive exchange rate policies in the development stories of many states. Weldzius (2021) suggests that global supply chain trade has contributed to the “end of currency manipulation” due to the decreased benefits of this beggar-thy-neighbor policy, but he does not address the transmission mechanism for the policy shift. In this paper, I address this transmission mechanism, arguing that intensified interdependence between countries has constrained the monetary policy choices of central banks, in particular, “non- hegemonic” central banks. These non-hegemonic central banks consider the impact of policy divergence from the hegemon in their regional trading bloc. The hegemon sets policy accord- ing to some exogenous rule, the outcome of which has spillover effects on the non-hegemons’ policy choices. The more interdepedence between the non-hegemon and hegemon, the more likely the non-hegemon converges on the hegemon’s monetary policy (cf. Bearce 2009). I test this theory by analyzing the central bank minutes and policy reports of 34 central banks in four regional trading blocs (North America, South America, Europe, and East/Southeast Asia) between 2000 and 2020. Using both unsupervised and supervised machine learning techniques, I measure how much non-hegemonic central banks are influenced by the monetary policy set by their regional hegemon (ECB, Fed, BoJ, and PBOC), conditional on the intensity of economic interdependence measured as global supply chain integration. I support the quantitative analyses with three case studies of Argentina, Sweden, and Thailand.
Ryan Weldzius. Land Reform and Divergence in Economic Growth: Evidence from India.
Using panel time-series data from 1957-1992, Besley and Burgess (2000) find that land reforms across sixteen Indian states had an appreciable effect on poverty reduction, but at the cost of depressed economic growth. Using an amended data set that can more precisely locate the partial equilibrium effects from land reform, this analysis of the Indian land reform story gives further support to the findings of Besley and Burgess, as well as analyzes how agricultural reforms in a subsistence economy can create the foundation for future economic growth by supplying labor to the manufacturing sectors in the industrialized core. Finally, the paper adds to the debate on “good” institutions by looking at how the political reaction to a peasant-based social movement affected the political disposition in India and the effective implementation of land reforms.
Ryan Weldzius. Path-Dependent Explanations of Equality and Growth: A Comparative Historical Analysis of Land Reform in Korea and the Philippines.
The economies in South Korea and the Philippines diverged beginning in 1960, with Korea sustaining “miraculous” growth for the next quarter century, transforming into a modern industrial state, while the Philippines stagnated, remaining a poor agrarian society. Although the two countries shared strikingly similar macroeconomic indicators in the early 1960s, they differed on a critical indicator: income distribution. In this paper, I utilize path-dependency to illustrate how Korea emerged from its colonial past with a relatively more equal distribution of income than the Philippines in 1960. Successful redistributive land reform in Korea after World War II created an environment that was more conducive to future industrialization. In contrast, land reform did not occur in the Philippines due to the weakened position of the peasantry from a decade long U.S. supported counterinsurgency, leaving the country in a low-output poverty trap. The analysis illustrates how land reform is largely used as a mechanism for countering peasant rebellions and how the unintended consequences of such reforms are conducive for industrialization and long-term economic growth.