An analysis of how chosen exchange rates regimes and exchange rate volatility affect bilateral maritime trade

In the year 1971, the link between the dollar and gold and the other currencies to the dollar was suspended – the end of the Bretton Woods System – and it was decided that the dollar would be delinked from gold and be allowed to float freely. Many nations followed suit with their own currencies. A whole literature followed on the economic impact of exchange rate regimes and exchange rate volatility. The Monetary Policy Trilemma was discovered and also that changing from one exchange rate regime to another could cause several damaging factors such as trade fluctuations and uncertainties. These conditions are also applicable to maritime industry, which on an average governs about 90% of the world trade. It is important to know, as a part of the shipping sector, which one of the exchange rate regimes shall be beneficial as a whole and how important exchange rate volatility is for maritime trade. The focus of this research, therefore, is to understand and analyze the impact of such exchange rates regimes and subsequent exchange rate volatility on bilateral maritime trade flows. Not many papers have been found that clearly mention that a particular exchange rate regime and subsequent volatility has an impact on maritime international trade. We first carry out a qualitative analysis on the post-Bretton Woods era until the present where the exchange rate regime and the shifts and trends in inter and intra-industry trade and subsequent elements in the maritime trade sector are analysed. Then a gravity regression approach us used on a panel dataset of 27 bilaterally trading nations over the tenure of 22 years from 1992 until 2013 to try to quantify the effect of exchange rate regimes and exchange rate volatility on bilateral maritime trade flows. Upon analysis, we find that individual chosen exchange rate regimes do have a significant impact on bilateral maritime trade. The fixed exchange rate regime has a sizeable (+0.40) and significant (at 1% level) positive effect on maritime trade flows. The managed and free floats, however, are both found to have a significantly negative effect (-0.17 and 0.08 respectively). Clearly for maritime trade, the element of the policy Trilemma that becomes visible, as an important determinant is the stability in exchange rates – which fixed exchange rates, exhibit most. We also find that the effect of exchange rate volatility on bilateral maritime trade flows is insignificant, even though we have looked at six different definitions of exchange rate volatility. That implies that from this research, we find that stability in exchange rates – through a fixed rate is the main driver for bilateral maritime trade flows.