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The Effect of Exchange Rate Changes on Trade in East Asia

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  • Willem THORBECKE

Abstract

East Asia is characterized by intricate production and distribution networks. Higher skilled workers in Japan, South Korea, and Taiwan produce sophisticated technology-intensive intermediate goods and capital goods and ship them to China and ASEAN for assembly by lower skilled workers and reshipment throughout the world. These networks have promoted economic efficiency and functioned as an engine of growth. They have also been accompanied by large trade imbalances with the U.S. that could cause Asian currencies to appreciate against the dollar. This in turn would alter relative exchange rates in Asia, given the variety of exchange rate regimes in the region. This paper investigates how such exchange rate changes would affect trade within Asia and between Asia and the U.S. The results indicate that exchange rate changes can cause significant declines in exports of intermediate and capital goods from developed Asia to developing Asia. This evidence implies that exchange rate appreciations in developed Asia relative to developing Asia would disrupt the complimentary relationship that exists between these countries in the trade of sophisticated technology-intensive goods. The results also indicate that exchange rate elasticities for trade between Asia and the U.S. are not large enough to lend confidence that a depreciation of the dollar would improve the U.S. trade balance with Asia. This evidence implies that policymakers in the U.S. should not expect too much from an appreciation of Asian currencies and should focus instead on shortfalls of saving relative to investment if they are concerned about their trade imbalances.

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Bibliographic Info

Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 06009.

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Length: 53 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:eti:dpaper:06009

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  1. Guillaume Gaulier & Françoise Lemoine & Deniz Ünal-Kesenci, 2005. "China’s Integration in East Asia: Production Sharing, FDI & High-Tech Trade," Working Papers 2005-09, CEPII research center.
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Cited by:
  1. Yoko Oguro, 2007. "The Influence of Intra-Industry Trade on Export Sensitivity to Exchange Rates," Hi-Stat Discussion Paper Series d07-222, Institute of Economic Research, Hitotsubashi University.
  2. 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 gd10-167, Institute of Economic Research, Hitotsubashi University.
  3. 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, vol. 27(C), pages 318-329.
  4. Garcia-Herrero, Alicia & Koivu, Tuuli, 2007. "Can the Chinese trade surplus be reduced through exchange rate policy?," BOFIT Discussion Papers 6/2007, Bank of Finland, Institute for Economies in Transition.
  5. Volz, Ulrich, 2013. "RMB internationalisation and currency co-operation in East Asia," Working Papers 125, University of Leipzig, Faculty of Economics and Management Science.
  6. Alicia García-Herrero & Tuuli Koivu, 2009. "China's exchange rate policy and Asian trade," BIS Working Papers 282, Bank for International Settlements.
  7. Natasha Hamilton-Hart, 2012. "Regional and multi-level governance: East Asian leadership after the global financial crisis," Asia Europe Journal, Springer, vol. 9(2), pages 237-254, March.
  8. Jaime Marquez & John W. Schindler, 2006. "Exchange-rate effects on China's trade: an interim report," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  9. Glenn Hoggarth & Hui Tong, 2007. "The impact of yuan revaluation on the Asian region," Bank of England working papers 329, Bank of England.
  10. Jaime Marquez & John W. Schindler, 2006. "Exchange-rate effects on China's trade: an interim report," Working Paper Series 2006-41, Federal Reserve Bank of San Francisco.
  11. Hamilton-Hart, Natasha, 2011. "Distribution, Domestic Politics and Monetary Cooperation in East Asia," ADBI Working Papers 332, Asian Development Bank Institute.

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