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.



The role of exchange rates in network trade flows:

This chapter presents a theoretical model of how (real) exchange rate changes are likely to affect the operations of an MNC and the different types of trade flows. In formulating the model both the general phenomenon of product fragmentation and the specific conditions found in the spread of IPNs in Asia and the Pacific are taken into account. IPN operations in the region encompass a range of countries of widely differing by factor endowments and income and wage levels. Instrumental to these was the emergence of China as the assembly centre for the final manufactured exports that are mainly destined for North America and the European Union.


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