A Predictive Effect of Exchange Rates on Value-Added Free Trade

Abstract

The study investigates a predictive exchange rate effect on value-added trade flows on global value chains. We theoretically review the role of exchange rates on international trade based on insular, open, and global value chained economies. This paper empirically confirms a retro forecasting rule of the exchange rate on exports and trade balance using the value-added data for the period from 1995 to 2015. The first result is that real effective exchange rates have predictive elasticity information for the value-added trade flows. The second is that exchange rates have two practical effects on trade flows. The value-added exchange rate hurts the value-added trade balance due to increased intermediate trades, but the exchange rate has a positive effect on the gross trade balance. We would expect that value-added exports with trade balance can be improved in all sample countries when the value-added exchange rate is increasing. The main contribution is further evidence on distinguishing the currency depreciation on the value-added trade from the depreciation on the gross trade to achieve higher growth.

Dominant Currency and Value-Added Exports

“…For value-added trade statistics in GVCs, Koopman et al (2014) and Johnson and Noguera (2012) measure value-added exports in accounting to avoid the double counting problem raised from gross exports. Choi (2020) and Choi et al (2019) use them to explain how the exchange rate effects on the value-added trade are different from those on the gross trade due to the increase of intermediary trades.…”