The Effects of the Exchange Rate on Value-Added International Trade to Enhance Free Trade Sustainability in GVCs

Abstract

This study investigates the role of value-added bilateral trade focused on global value chains to achieve sustainable economic development. Our findings address trade policy implications that help to mitigate the global imbalances and exchange rate conflicts. These policies are expected to provide a competitive advantage that can be crucial to the sustainability of free trade. We apply traditional trade models to the value-added framework to examine the effects on value-added trade. Empirically, we investigate the bilateral value-added trade for recent years. Our major findings are that currency devaluation has a positive effect on value-added exports but has a negative effect on gross exports because of the effect on intermediate goods trading dominating the effect on international trade, i.e., the effect on foreign content of intermediate imports dominating the effect on the domestic content of exports. The same effect applies to imports. Also, we confirm that foreign income has a positive effect on exports and value-added exports, and domestic income has a positive effect on imports and value-added imports. However, their effects on trade balance are not consistent. Our major findings imply that the analysis of value-added trade can best contribute to the sustainability of global free trade by considering trade policies as a result of reflecting the easing of the global imbalance and the exchange rate war.

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.…”

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

“…Particularly, the effect of value-added exchange rates on value-added trade flows may be significantly different from the exchange rate effect on gross trade flows because some imports are inputs into the production of exports and some imports are complements in domestic value-added production. In this matter, Choi et al [13] find that domestic depreciation from the value-added exchange rate has a positive effect on value-added exports but a negative effect on gross exports because of huge intermediate goods trade and double-counting problem.…”