Bought, Sold, and Bought Again: The Impact of Complex Value Chains on Export Elasticities

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Policy Research Working Paper 8535Global value chain participation affects the exchange rate pass-through to export prices and export volumes. The paper develops a partial equilibrium model of international trade with cross-border production and shows that higher participation in global value chains reduces the elasticities. Specifically, a higher share of foreign value added in exports reduces the exchange rate pass-through to export prices and export volumes. A greater share of exports that return as imports also reduces the responsiveness of export volumes to changes in bilateral exchange rates. Finally, exports of inputs that are further re-exported increase the responsiveness to the trading partner's effective exchange rate. Using a novel sector-level panel dataset with 40 countries, the analysis tests and finds strong empirical support for the theoretical predictions. The paper further shows that some sectors in some countries can even experience a decline in gross exports when their currency depreciates. This paper is a product of the Office of the Chief Economist, Middle East and North Africa Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world.

Trade and Worker Deskilling

“…30 On first reflection, it might seem surprising that export prices do not move much despite the large exchange rate shock. But this is in fact consistent with a growing body of work that finds low exchange rate pass through on the exporting side (Amiti et al 2014, Ahmed et al 2015, de Soyres et al 2018, Fauceglia et al 2015. This literature on exchange rate disconnect identifies intermediate imports and global value chain participation as channels for low export responses due to rising import costs.…”

Macroeconomic and distributional impacts of exchange rate devaluation in Ethiopia: A computable general equilibrium approach

“…This is particularly important given the growing manufacturing sector in Ethiopia. The implications of global value chain on export performance is well documented in the literature (see for instance, Amiti et al., 2014; Ahmed et al., 2017a, Ahmed et al., 2017b; Leigh et al., 2017; de Soyres et al., 2018). de Soyres et al.…”

Global Value Chains and External Adjustment

“…The latter is one of the main contributions of this paper. Because the rigidities associated with GVCs may play different roles 1 See related work in, among others, (Amiti, Itskhoki, & Konings, 2014); (Bems, Intermediate inputs, external rebalancing and relative price adjustment, 2014); (Borin & Mancini, 2019); Chapter 3 of (IMF, 2015); (Cheng, Rehman, Seneviratne, & Zhang, 2015); (Bems & Johnson, Demand for Value Added and Value-Added Exchange Rates, 2015); (Leigh, et al, 2017); (Bayoumi, Appendino, Barkema, & Cerdeiro, 2018); (de Soyres, Frohm, Gunnella, & Pavlova, 2018). at different time horizons, special attention is given to their importance in the short versus medium term.…”