International Production Sharing and Exchange Rates of Asian Countries

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Recent years has seen a sharp increase in the trade of intermediate goods between ASEAN countries and China, reflecting the emergence of China as a regional “assembly centre” and sourcing the bulk of parts and components from countries in South-East and North-East Asia in the production of final goods for export to the United States and the European Union. This expansion of trade in intermediates is closely linked to the spread of international production networks (IPNs) in Asia. The expansion raises important new analytical and policy challenges generating rapidly growing literature. This study focuses on how new patterns of production and trade influence the effects of exchange rates on international trade flows of manufactured goods, and draws attention to several ways in which IPNs have altered the nature of international production and trade.



Exchange rates and production sharing in Asia

This chapter investigates the relationships between exchange rates and trade flows associated with production sharing. Based on the key insights gained from the theoretical model, an empirically implementable econometric model is specified. It should be noted that the empirical exercises based on country-level trade data should not be interpreted as a direct test of the theoretical model of firm-level decision-making. This theoretical model provides insights into the firm’s decisions on production sharing between subsidiaries in several countries. A direct test of the model then requires a rich micro-level dataset regarding “intra-firm” trading in intermediate inputs used in the final production of given products. However, such highly disaggregated data of intra-firm trade would be confidential. In addition, it is likely that the data would not be comparable across firms. Keeping in mind those limitations, it must be emphasized that any inference from the firm-level model to the industry-level trade patterns should be made with caution. Nevertheless, it can be argued that modelling the behaviour of a representative firm provides conceptualizations about the relationships between exchange rates and IPN trade flows that are empirically plausible and consistent with the core features of the theoretical model. Insights from the theoretical model is examined indirectly by using industrial-level data based on an assumption that a country’s IPN trade flows at industry level partly reflects the collective actions of IPN participating firms.


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