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The Effect of Exchange Rate Changes on Trade in East Asia


  • Willem THORBECKE


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.

Suggested Citation

  • Willem THORBECKE, 2006. "The Effect of Exchange Rate Changes on Trade in East Asia," Discussion papers 06009, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:06009

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    References listed on IDEAS

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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. repec:ilo:ilowps:486999 is not listed on IDEAS
    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. Hamilton-Hart, Natasha, 2011. "Distribution, Domestic Politics and Monetary Cooperation in East Asia," ADBI Working Papers 332, Asian Development Bank Institute.
    5. Alicia Garcia-Herrero & Tuuli Koivu, 2008. "China'S Exchange Rate Policy And Asian Trade," Economie Internationale, CEPII research center, issue 116, pages 53-92.
    6. 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.
    7. Mourad Zmami & Ousama Ben-Salha, 2015. "Exchange rate movements and manufacturing employment in Tunisia: Do different categories of firms react similarly?," Economic Change and Restructuring, Springer, vol. 48(2), pages 137-167, May.
    8. 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.
    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. Hooy, Chee-Wooi & Siong-Hook, Law & Tze-Haw, Chan, 2015. "The impact of the Renminbi real exchange rate on ASEAN disaggregated exports to China," Economic Modelling, Elsevier, vol. 47(C), pages 253-259.
    11. Jaime R. Marquez & John W. Schindler, 2006. "Exchange-rate effects on China's trade: an interim report," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    12. Jaime R. 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.
    13. Volz, Ulrich, 2013. "RMB internationalisation and currency co-operation in East Asia," Working Papers 125, University of Leipzig, Faculty of Economics and Management Science.

    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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