Collateral Damage: Exchange Controls and International Trade

January 1, 2007

Preview Citation

Format: Chicago

Zhiwei Zhang, and Shang-Jin Wei. Collateral Damage: Exchange Controls and International Trade, (USA: International Monetary Fund, 2007) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

While new conventional wisdom warns that developing countries should be aware of the risks of premature capital account liberalization, the costs of not removing exchange controls have received much less attention. This paper investigates the negative effects of exchange controls on trade. To minimize evasion of controls, countries often intensify inspections at the border and increase documentation requirements. Thus, the cost of conducting trade rises. The paper finds that a one standard-deviation increase in the controls on trade payment has the same negative effect on trade as an increase in tariff by about 14 percentage points. A one standard-deviation increase in the controls on FX transactions reduces trade by the same amount as a rise in tariff by 11 percentage points. Therefore, the collateral damage in terms of foregone trade is sizable.

Subject: Capital controls, Exchange restrictions, Foreign exchange, Imports, Tariffs

Keywords: Control, Exchange controls, Trade, Transaction, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/008
Stock No:

WPIEA2007008
ISBN:

9781451865721
ISSN:

1018-5941

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