Global Value Chains and External Adjustment

Abstract

The paper explores how international integration through global value chains shapes the working of exchange rates to induce external adjustment both in the short and medium run. The analysis indicates that greater integration into international value chains reduces the exchange rate elasticity of gross trade volumes. This result holds both in the short and medium term, pointing to the rigidity of value chains. At the same time, greater value chain integration is associated with larger gross trade flows, relative to GDP, which tends to amplify the effect of exchange rate movements. Overall, combining these two results suggests that, for most countries, integration into global value chains does not materially alter the working of exchange rates and the benefits of exchange rate flexibility in facilitating external adjustment remain.

The Renminbi as a Trading Currency: Evidence from Selected Countries Participating in the Belt and Road Initiative

“…The level of ERPT would affect both trade price and trade volume. The empirical analysis of the ERPT onto prices is constructed in accordance with the approach adopted by Gopinath et al (2020) and Adler et al (2019a):…”

“…This is because integrated GVCs imply that the exchange rate fluctuations of the non-trading countries would affect bilateral trade through the supply of intermediate goods and the demand for final goods. Adler et al (2019a) suggest that traditional bilateral trade has a stand-alone effect on trade prices and volumes, which is the impact of the bilateral exchange rate fluctuations of the two trading partners. In addition to the the stand-alone effect, they fi nd that a third country's exchange-rate fl uctuations could further infl uence trade through additional effects from the supply and demand sides with backward and forward linkages, respectively.…”

“…Bems (2014) adds production inputs into the traditional multi-sector macro model and suggests that the traditional value-added model without production inputs might generate mismeasured price elasticities. Adler et al (2019a) compare GVC-related trade with traditional trade and suggest that bilateral trade could be affected by a third country through the changes in the marginal cost of intermediate goods and the demand for fi nal goods via backward and forward GVC linkages, respectively. They fi nd that integration…”

“…1 We propose that, on the one hand, the countries integrate into the GVCs through forward linkages -their exports to China are in the form of intermediate goods, which can then be manufactured and re-exported elsewhere. On the other hand, the BRI countries also import a large quantity of intermediate goods from China, following the traditional trade pattern described by Adler et al (2019a). We examine the extent to which the bilateral exchange rate of the local currencies against…”

“…the sample countries also import a large quantity of intermediate and fi nal goods from China, and the imports from China are more likely to follow the pattern of traditional bilateral trade inAdler et al (2019a). In this case, fl uctuation of the RMB exchange rate would have an impact on trade prices and volumes.…”