Bought, sold and bought again: The impact of complex value chains on export elasticities

Abstract

Global value chain (GVC) participation affects the relationship between trade volumes and exchange rate movements. Guided by a simple theory, we show that exports react to the exchange rate between the country producing value added contained in exports and the country of final absorption for this value added. Three predictions follow: (i) a higher share of foreign value added in exports reduce the responsiveness of export volumes to exchange rate changes, (ii) a greater share of exports that returns as imports also reduce the responsiveness of export volumes and (iii) a higher share of inputs that are further reexported increase the responsiveness of exports to the trading partner's nominal effective exchange rate. Using a large origin-sector-destination level panel data set covering the period 1995-2009 and around 85% of world GDP, we find strong empirical support for these predictions. We further show that some sectors in some countries can experience a decline in gross exports when their currency depreciates.

Global value chains and exchange rate pass-through—The role of non-linearities

“…In our paper we follow another strand of literature, which relates the drop in ERPT to import prices to development of global values chains (GVC). As pointed out by some authors (Amiti et al, 2014, Georgiadis et al, 2019, De Soyres et al, 2018 vertical specialization within global value chains accompanied by higher import intensity of exports may result in weaker response of import prices to exchange rate fluctuations. This mechanism can be described as follows.…”

“…In this strand of literature Georgiadis et al (2019) propose a structural two-country model with trade in intermediate goods and local/producer-currency pricing to study a variation in the share of imported intermediate goods in the overall production costs. They evidence a decrease in ERPT to import prices and increase in ERPT to export prices in local (home) currency due to the growing GVC participation for 33 advanced and emerging economies in 2000. De Soyres et al (2018 report a decline in exchange rate pass-through to export prices in destination (foreign) currency as a result of more intensive GVC participation for 40 developed and emerging economies in years 1995-2009.…”

“…In the first step the exchange rate pass-through coefficient is calculated for a rolling sample and next the estimates of ERPT from the first step are regressed on various GVC participation measures (Georgiadis et al, 2019). The second approach is a one-step method and uses linear models with explanatory interaction variables constructed as a product of nominal exchange rate and different measures of GVC participation (De Soyres et al, 2018). Both methods assume the linear relationship between the degree of GVC participation and the value of exchange rate pass-through.…”

How Voters Respond to Currency Crises: Evidence From Turkey

“…Exchange rate depreciations actually have stronger effects on import prices than on export prices (Choudri & Hakura, 2015, 3); thus, depreciations should reduce the profits of firms that are equally dependent on imports and exports. Firms that use imported components are also less likely to raise export prices or increase the amount that they export following a currency depreciation (Amiti et al, 2014;de Soyres et al, 2021). In fact, existing evidence suggests that depreciations actually lead to a decrease in exports among industries that are highly dependent on imports (de Soyres et al, 2021).…”

“…Firms that use imported components are also less likely to raise export prices or increase the amount that they export following a currency depreciation (Amiti et al, 2014;de Soyres et al, 2021). In fact, existing evidence suggests that depreciations actually lead to a decrease in exports among industries that are highly dependent on imports (de Soyres et al, 2021).…”