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The Effect of Exchange Rate Changes on Trade in East Asia

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  • Willem Thorbecke

    (Asian Development Bank Institute (ADBI))

Abstract

This paper considers how exchange rates affect East Asian trade. The evidence indicates that exports produced within regional production networks depend on exchange rates throughout the region while labor-intensive exports depend on exchange rates in the exporting country. These results make sense since the majority of the value-added of processed exports come from imported parts and components while most of the value-added of labor-intensive exports comes from the domestic economy. Recent findings also indicate that imbalances between the People’s Republic of China (PRC) and the United States are a major outlier and that an appreciation of the PRC yuan (CNY) is necessary to reduce these imbalances.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 23274.

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Date of creation: Jan 2011
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Handle: RePEc:eab:financ:23274

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Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
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Keywords: effects of the exchange rate; trade; East Asia; regional production networks; exports; China; PRC;

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References

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  1. Leamer, Edward E. & Levinsohn, James, 1995. "International trade theory: The evidence," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394 Elsevier.
  2. Alan G. Ahearne & John G. Fernald & Prakash Loungani & John W. Schindler, 2003. "China and emerging Asia: comrades or competitors?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 789, Board of Governors of the Federal Reserve System (U.S.).
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  4. Koichiro Kamada & Izumi Takagawa, 2005. "Policy Coordination in East Asia and across the Pacific," Hi-Stat Discussion Paper Series, Institute of Economic Research, Hitotsubashi University d05-101, Institute of Economic Research, Hitotsubashi University.
  5. Kyoji Fukao & Hikari Ishido & Keiko Ito, 2003. "Vertical Intra-Industry Trade and Foreign Direct Investment in East Asia," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 03001, Research Institute of Economy, Trade and Industry (RIETI).
  6. Alice Y. Ouyang & Ramkishen S. Rajan & Thomas D. Willett, 2007. "China as a Reserve Sink: The Evidence from Offset and Sterilization Coefficients," Working Papers, Hong Kong Institute for Monetary Research 102007, Hong Kong Institute for Monetary Research.
  7. Guillaume Gaulier & Françoise Lemoine & Deniz Ünal-Kesenci, 2005. "China’s Integration in East Asia: Production Sharing, FDI & High-Tech Trade," Working Papers, CEPII research center 2005-09, CEPII research center.
  8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 817-38, May.
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  10. Joseph E. Gagnon, 2004. "Growth-led exports: is variety the spice of trade?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 822, Board of Governors of the Federal Reserve System (U.S.).
  11. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 91-3, Federal Reserve Bank of Chicago.
  12. Joseph E. Gagnon, 2003. "Long-run supply effects and the elasticities approach to trade," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 754, Board of Governors of the Federal Reserve System (U.S.).
  13. Ronald McKinnon & Gunther Schnabl, 2003. "Synchronised Business Cycles in East Asia and Fluctuations in the Yen/Dollar Exchange Rate," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 26(8), pages 1067-1088, 08.
  14. Agnès Bénassy-Quéré & Amina Lahrèche-Revil, 2003. "Trade Linkages and Exchange Rates in Asia: The Role of China," Working Papers, CEPII research center 2003-21, CEPII research center.
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Citations

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Cited by:
  1. Wu, Po-Chin & Liu, Shiao-Yen & Pan, Sheng-Chieh, 2013. "Nonlinear bilateral trade balance-fundamentals nexus: A panel smooth transition regression approach," International Review of Economics & Finance, Elsevier, Elsevier, vol. 27(C), pages 318-329.
  2. Volz, Ulrich, 2013. "RMB internationalisation and currency co-operation in East Asia," Working Papers, University of Leipzig, Faculty of Economics and Management Science 125, University of Leipzig, Faculty of Economics and Management Science.
  3. Glenn Hoggarth & Hui Tong, 2007. "The impact of yuan revaluation on the Asian region," Bank of England working papers, Bank of England 329, Bank of England.
  4. Natasha Hamilton-Hart, 2012. "Regional and multi-level governance: East Asian leadership after the global financial crisis," Asia Europe Journal, Springer, Springer, vol. 9(2), pages 237-254, March.
  5. Garcia-Herrero, Alicia & Koivu, Tuuli, 2007. "Can the Chinese trade surplus be reduced through exchange rate policy?," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 6/2007, Bank of Finland, Institute for Economies in Transition.
  6. Jaime Marquez & John W. Schindler, 2006. "Exchange-rate effects on China's trade: an interim report," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jun.
  7. Alicia García-Herrero & Tuuli Koivu, 2009. "China's exchange rate policy and Asian trade," BIS Working Papers, Bank for International Settlements 282, Bank for International Settlements.
  8. Jaime Marquez & John W. Schindler, 2006. "Exchange-rate effects on China's trade: an interim report," Working Paper Series, Federal Reserve Bank of San Francisco 2006-41, Federal Reserve Bank of San Francisco.
  9. Yoko Oguro, 2007. "The Influence of Intra-Industry Trade on Export Sensitivity to Exchange Rates," Hi-Stat Discussion Paper Series, Institute of Economic Research, Hitotsubashi University d07-222, Institute of Economic Research, Hitotsubashi University.
  10. Yoko Oguro, 2011. "The Sensitivity of Export Quantities to Exchange Rates in the Context of Intra-Industry Trade," Global COE Hi-Stat Discussion Paper Series, Institute of Economic Research, Hitotsubashi University gd10-167, Institute of Economic Research, Hitotsubashi University.
  11. Hamilton-Hart, Natasha, 2011. "Distribution, Domestic Politics and Monetary Cooperation in East Asia," ADBI Working Papers, Asian Development Bank Institute 332, Asian Development Bank Institute.

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