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Investigating the Effect of Exchange Rate Changes on Transpacific Rebalancing

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  • Thorbecke, Willem

    (Asian Development Bank Institute)

  • Komoto, Ginalyn

    (Asian Development Bank Institute)

Abstract

This paper investigates the role that exchange rate changes can play in rebalancing transpacific trade. It presents evidence from a gravity model indicating that the exports from the People’s Republic of China (PRC) to the United States (US) are a key outlier in the global economy and that imbalances between the PRC and the US have remained large during the financial crisis that began in September 2008. It then reports that an appreciation of the yuan against the dollar would be required to rebalance bilateral trade between the US and the PRC. In the case of multilateral trade between the US and the rest of the world, on the other hand, the evidence indicates that a depreciation of the dollar would not substantially reduce the US global trade deficit. In the case of Asia’s exports, results presented here and elsewhere indicate that: (i) sophisticated exports produced within regional production networks depend on exchange rates throughout the region; (ii) labor-intensive exports from developing Asian countries are strongly influenced by each country’s own exchange rate; (iii) developing Asian countries compete extensively with each other in exports to third markets; (iv) a currency appreciation in developing Asia would increase capital and consumption goods imports; and (v) exchange rate volatility deters parts and components trade in Asia. These findings imply that Asia and the rest of the world would benefit if East Asian currencies could appreciate together against external currencies while maintaining relative currency stability within the region.

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File URL: http://www.adbi.org/files/2010.08.08.wp247.effect.rate.changes.transpacific.rebalancing.pdf
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Bibliographic Info

Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 247.

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Length: 28 pages
Date of creation: 08 Sep 2010
Date of revision:
Handle: RePEc:ris:adbiwp:0247

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Keywords: transpacific trade; exchange rate rebalancing;

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References

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  1. Koichiro Kamada & Izumi Takagawa, 2005. "Policy Coordination in East Asia and across the Pacific," Hi-Stat Discussion Paper Series d05-101, Institute of Economic Research, Hitotsubashi University.
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Cited by:
  1. Willem Thorbecke & Atsuyuki Kato, 2011. "The Effect of Exchange Rate Changes on Japanese Consumption Exports," Macroeconomics Working Papers 23238, East Asian Bureau of Economic Research.
  2. Murad, S. M. Woahid, 2012. "Bilateral Export and Import Demand Functions of Bangladesh: A Cointegration Approach," MPRA Paper 36919, University Library of Munich, Germany.
  3. THORBECKE, Willem, 2012. "The Short- and Long-Run Effects of Exchange Rate Changes on the Japanese Electronics Industry," Discussion papers 12019, Research Institute of Economy, Trade and Industry (RIETI).
  4. THORBECKE, Willem, 2014. "China-U.S. Trade: A global outlier," Discussion papers 14039, Research Institute of Economy, Trade and Industry (RIETI).
  5. Philip Levy, 2011. "The United States and the PRC : Macroeconomic Imbalances and Economic Diplomacy," Governance Working Papers 23208, East Asian Bureau of Economic Research.
  6. Bernhardt, Thomas, 2014. "How promising is South-South trade as a contributor to economic development in Asia and South America? Insights from estimating income elasticities of import demand," MPRA Paper 56413, University Library of Munich, Germany.

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