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Investigating the Effect of Exchange Rate Changes on Transpacific Rebalancing

Author

Listed:
  • Willem Thorbecke

    (Asian Development Bank Institute)

  • Ginalyn Komoto

    (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.

Suggested Citation

  • Willem Thorbecke & Ginalyn Komoto, 2010. "Investigating the Effect of Exchange Rate Changes on Transpacific Rebalancing," ADBI Working Papers 247, Asian Development Bank Institute.
  • Handle: RePEc:ris:adbiwp:0247
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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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    References listed on IDEAS

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    1. Koichiro Kamada & Izumi Takagawa, 2005. "Policy coordination in East Asia and across the Pacific," International Economics and Economic Policy, Springer, vol. 2(4), pages 275-306, December.
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    Cited by:

    1. Francesco Aiello & Graziella Bonanno & Alessia Via, 2015. "Again on trade elasticities: evidence from a selected sample of countries," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 5(2), pages 259-287, December.
    2. Thorbecke, Willem, 2015. "China–US trade: A global outlier," Journal of Asian Economics, Elsevier, vol. 40(C), pages 47-58.
    3. Philip Levy, 2011. "The United States and the PRC : Macroeconomic Imbalances and Economic Diplomacy," Macroeconomics Working Papers 23208, East Asian Bureau of Economic Research.
    4. Willem THORBECKE, 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).
    5. Philip I. Levy, 2011. "The United States and China: macroeconomic imbalances and economic diplomacy," AEI Economics Working Papers 49156, American Enterprise Institute.
    6. Thorbecke, Willem & Kato, Atsuyuki, 2011. "The Effect of Exchange Rate Changes on Japanese Consumption Exports," ADBI Working Papers 298, Asian Development Bank Institute.
    7. S. M. Woahid Murad, 2012. "Bilateral Export and Import Demand Functions of Bangladesh: A Cointegration Approach," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 35(1), pages 43-60.
    8. 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.
    9. Bernhardt, Thomas, 2016. "South-South trade and South-North trade: which contributes more to development in Asia and South America? Insights from estimating income elasticities of import demand," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.

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    More about this item

    Keywords

    transpacific trade; exchange rate rebalancing;

    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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