Global Value Chains and the Exchange Rate Elasticity of Exports

Abstract

This paper analyzes how the formation of Global Value Chains (GVCs) has affected the exchange rate elasticity of exports. Using a panel framework covering 46 countries over the period 1996-2012, we first find some suggestive evidence that the elasticity of real manufacturing exports to the Real Effective Exchange Rate (REER) has decreased over time. We then examine whether the formation of supply chains has affected this elasticity using different measures of GVC integration. Intuitively, as countries are more integrated in global production processes, a currency depreciation only improves competitiveness of a fraction of the value of final good exports. In line with this intuition, we find evidence that GVC participation reduces the REER elasticity of manufacturing exports by 22 percent, on average.

Measuring What Matters in Global Value Chains and Value-Added Trade

“…Finally, other studies have measured a country's forward GVC participation by identifying the export components that are later re-exported by the direct importer, as we propose here (see, among others, Rahman and Zhao, 2013;Cappariello and Felettigh, 2014;Ahmed et al, 2017;Altomonte et al 2018). However, these contributions rely on the decomposition of gross exports of Koopman et al (2014) or, alternatively, on that of Wang et al (2013).…”

Does the distinction between gross and value‐added exports matter? An empirical investigation of export elasticities

“…Several recent studies have posited that greater participation in GVCs could lower the price elasticity of exports via backward and forward linkages. With backward linkages a currency depreciation raises the cost of imported inputs, mitigating the depreciation’s impact on foreign‐currency export prices and export volumes (Ahmed et al, ; Cheng et al, ). As Koopman, Tsigas, Riker, and Powers () demonstrate, the price elasticity can be expressed as a positive function of the share of domestic value added in exports.…”

“…There is conflicting empirical evidence about whether this matters for aggregate trade elasticities. On the one hand, several cross‐country studies find that the price elasticity of gross exports is lower when GVC participation is higher (Ahmed, Appendino, & Ruta, ; Cheng, Hong, Seneviratne, & van Elkan, ), and that the price elasticity has fallen over time as GVCs have grown (Ahmed et al, ). On the other hand, Leigh, Lian, Poplawski‐Ribeiro, and Tsyrennikov () question the practical significance of GVCs for the relationship between exchange rates, trade prices, and trade volumes, finding no conclusive evidence that it has weakened over time.…”

“…On the other hand, Leigh, Lian, Poplawski‐Ribeiro, and Tsyrennikov () question the practical significance of GVCs for the relationship between exchange rates, trade prices, and trade volumes, finding no conclusive evidence that it has weakened over time. With the exception of Ahmed et al (), however, these studies stop short of directly comparing elasticities for gross and value‐added exports.…”

External adjustment in oil exporters: The role of fiscal policy and the exchange rate

“…Exchange rate pass-through to domestic prices can increase exporters' input costs (Amiti, Itskhoki, & Konings, 2014), which may lead to a mark-up by the exporter. There is some evidence that countries with a low share of domestic value added have lower export responses to exchange rate changes (Ahmed, Appendino, & Ruta, 2015).…”