The Impact of a Common Currency on East Asian Production Networks and China's Exports Behavior (original) (raw)

ESSAYS ON REGIONAL EXCHANGE RATE MANAGEMENT AND TRADE INTEGRATION IN EAST ASIA

The thesis is that vertical fragmentation of product value chain is the driving force of growing economic interdependency in East Asia. It requires all East Asian countries to move towards a currency area arrangement whereby the countries either share a single currency or have their exchange rates fixed to one another. The proposition of flexible exchange rates is misplaced and against the goal of regional integration in East Asia. It is in this context the following two self-contained essays are examining the effect of a regional exchange rate management on East Asian trade integration. The following paragraphs outline their respective abstracts. The first essay is “The impact of a common currency on East Asian production networks and China’s exports behavior.” The argument is that a common currency, not flexible exchange rates between national currencies, would reduce flexibility in relative prices within East Asia. Its impact would be far greater for exports that have stronger pr...

Trade Patterns and Exchange Rates in East Asia

This paper shows that East Asian trade pattern exhibits a dynamic shift in the regional value chain. Several developing Asian economies including China notably gained comparative advantage in the production and exporting of medium-and-high technology products. Japan and the NIEs further deepened their intra-regional comparative advantage across product lines. Nonetheless, the region significantly depends on final demands from the Americas and Europe. The build-up of an unsustainable payment imbalance in the US was substantially mirrored in the reserve accumulation by East Asian countries. Given that a disorderly unwinding of the imbalance is in progress amid the global financial crisis and a fear of prolonged recession, the present study examines how real exchange rate changes and a shift in relative demand will affect exports from the East Asian countries. The findings show that both the real exchange rate change and a shift in relative foreign income would significantly reduce exports from East Asia. The findings further show that with the value chain becoming increasingly fragmented along the production network, changes in the intra-regional exchange rates significantly affect their exports but in an asymmetric way. The implication is that the production network has called for a greater symmetry in their intra-regional real exchange rates. An arrangement whereby East Asian exchange rates converge to relative stability within the region but greater flexibility against others (particularly the US dollar and Euro) would itself be a mechanism for international adjustment.

The Impact of Real Exchange Rate Flexibility on East Asian Exports

This paper estimates the impact of intra-regional real exchange rate flexibility on East Asian exports. The hypothesis is that the impact would be negative for East Asian countries regardless of their exchange rate regimes. The results validate the hypothesis. The findings show that for Chinese exports the long-run effect is as much as that of a real appreciation of Renminbi. By contrast, for Japanese exports the effect is three-times larger than that of a real appreciation of Yen. The findings imply that a regional currency basket mechanism would lessen the adverse effect of exchange rate flexibility and engineer a collective exchange rate adjustment for resolving global payment imbalance against East Asia.

The Effect of a Collective Exchange Rate Adjustment on East Asian Exports

This paper estimates long-run effects of a collective exchange rate adjustment on multilateral exports from China, Japan, South Korea, and Taiwan. The findings show that a 1 percent generalized appreciation of all East Asian exchange rates would reduce East Asian exports by about 3 per cent.

Industry-specific exchange rate volatility and intermediate goods trade in Asia

Scottish Journal of Political Economy, 2016

This paper empirically analyzes the effect of exchange rate volatility on intra-Asian trade of intermediate goods at an industry level by constructing a new dataset of the industry-specific bilateral real exchange rate. As the final processed exports are destined for countries outside the Asian region, both the exchange rate and world demand are considered as a possible driving force in the cross-border fragmentation and processing trade. It is found that, in contrast to the recent studies, the exchange rate impact on intra-regional trade differs across industries. The exchange rate volatility has negative and significant effects only on the general machinery industry and a part of the electric machinery industry with more differentiated products, even when taking into account the world's demand for the final processed exports. These findings are supported by various kinds of exchange rate volatility in the short-and long-run. Our empirical results suggest that the different impact of the exchange rate volatility across industries is tied to the characteristics of traded goods in respective industries.

Regional Currency or Regional Trade Policy? An East Asian Perspective of 21st Century Growth

Being inspired by initial Euro-success, renowned economist Robert Mundell was overoptimistic about adoption of a large currency area in Asia; however, empirical literature on East Asian regional currency is yet inconclusive. Advocates of the optimum currency area (OCA) theory identifies trade enhancement as a major benefit of regional currency adoption. East Asia, however, enjoys high trade enhancement for decades through their ongoing regional integration process in spite of long-practiced controversial individual currency arrangements. As such, a well-managed regional trade policy seems more appropriate for East Asian trade and economic growth. Existing literature consistently ignores the importance of East Asian regional 'trade policy' integration and limit the focus to regional 'trade' integration motivated by the OCA literature.

Equilibrium Exchange Rate of Asian Currencies: the Chinese Renminbi

We estimate the equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis-à-vis the U.S. dollar from 1992 to 20098. In contrast to the recent empirical studies on the EER employing a large cross-country analysis, we focus on the supply side real factors in estimating the EER by extending the Yoshikawa (1990) model. To better reflect China's processing exports in the context of growing intra-regional trade in Asia, we incorporate in the empirical analysis the source country breakdown data on import prices and input coefficients of intermediate inputs by constructing an annual new International Input-Output (IIO) table for the period from 1992 to 20098. The results show that the EER of Chinese RMB appreciates sharply from 2005 to 20098, suggesting that the current RMB exchange rate has been substantially undervalued and should be revalued by 4665 percent as of 2009 compared tofrom the year 20004 level. Such sharp appreciation of the EER corresponds to the dramatic increase in China's current account surplus from the mid-2000s, especially against the United States, which is ascribed to the significant improvement of both labor and intermediate input coefficients in China. JEL Classification: F31, F33, F15

International Production Sharing and Exchange Rates of Asian Countries

ESCAP Studies in Trade and Investment, 2016

The opinions, figures and estimates set forth in this publication are the responsibility of the authors, and should not necessarily be considered as reflecting the views or carrying the endorsement of the United Nations. The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area, or of its authorities, or concerning the delimitation of frontiers or boundaries. Mention of firm names and commercial products does not imply the endorsement of the United Nations. All material in this publication may be freely quoted or reprinted, but acknowledgment is required, together with a copy of the publication containing the quotation or reprint. The use of the publication for any commercial purposes, including resale, is prohibited, unless permission is first obtained from Secretary of the Publications Board, United Nations, New York. Requests for permission should state the purpose and the extent of reproduction. This publication has been issued without formal editing. v Preface and acknowledgments The expansion of international production networks (IPNs), alternatively referred to as "global value chains", raises important new analytical and policy challenges. This study demonstrates how the growing importance of international product fragmentation and intermediate goods in international trade has altered the links between exchange rates and international trade flows. This publication is not intended to provide comprehensive coverage of the topic. viii List of Tables 1. Shares of the Asia-Pacific region in global exports of customized intermediate and final products by subregion and selected economies, 2. Partners in Asia-Pacific intermediate goods trading 3. Sources of IPN-associated intermediate imports by selected industries in China, 2011 4. Fixed-effects estimations of exchange-rate effects on intermediate imports by China from selected Asian countries, 1992-2011 5. Fixed-effects estimations of exchange-rate effects on intermediate imports by China from selected Asian countries, 1992-2011: electronics 6. Fixed-effects estimations of exchange rate effects on intermediate imports by China from selected Asian countries, 1992-2011: apparel and footwear 7. Fixed-effects estimations of exchange-rate effects on intermediate imports by China from selected Asian countries, 1992-2011: automotive 8. Intensive-margin effects 9. Intensive-margin effects by country: electronics 7 The difference between intermediate and capital goods lies in the latter entering as a fixed asset in the production process. Like any primary factor (such as labour, land or natural resources), capital is used but not used up in the production process. On the contrary, an intermediate good is used, often transformed, and incorporated in the final output (Miroudot and others, 2009). 8 The traditional classification into raw materials, intermediate and machinery, and final manufactured goods as put forwarded by Lall (1998 and 2000) are too aggregate and not suitable to the IPN-trade context. For example, the classification by Lall (1998 and 2000) of intermediate goods includes final machinery items (such as road vehicles) and primary inputs (such as iron and steel, and plastic in primary forms) as intermediate goods. 9 The classification by Sturgeon and Memodevic (2010) is the modification of the Broad Economic Category (BEC) classification into customized and generic intermediate goods. An alternative classification is the list of parts and components based on Standard International Trade Classification (SITC) revision 3, proposed by Athukorala (2005). 10 The product lists are presented in Annex 1. Source: Author's calculations using United Nations Comtrade data based on the classification by Sturgeon and Memodevic (2010) of customized intermediate products. The expansion of IPNs in the Asia-Pacific region is still concentrated in the major trading economies in East Asia, which include East and NorthEast Asia and SouthEast Asia (table 1). More than 70 per cent of IPN component exports by Asia and the Pacific in 2011 originated from East and NorthEast Asian economies, with China, Japan, and the Republic of Korea as the top three exporters. In SouthEast Asia, Indonesia, Malaysia, the Philippines, Singapore and Thailand industries where research suggested a prevalence of IPNs, i.e., electronics, automotive and apparelfootwear. Annex 1 provides a full description of the products in the list.