Impact of exchange rates on ASEAN's trade in the era of global value chains: An empirical assessment

ABSTRACT

Exchange rate risk remains a key concern for export-oriented economies in Southeast Asia. Traditionally, export performance is thought to be adversely affected by exchange rate appreciation and high exchange rate volatility. Nonetheless, in the context of global value chains where export production relies heavily on imported inputs, the trade effects of exchange rate may be weakened. Using the OECD-WTO Trade in Value-added (TiVA) database, this paper seeks to tease out the association between exchange rate movements, volatility and aggregate exports of goods and services among ASEAN economies. More importantly, it investigates whether integration into GVCs affects these relationships. Applying panel regression techniques to a sample of eight ASEAN countries over the period 1995–2011, we found that high share of foreign value added (FVA) embodied in exports almost completely offsets the negative effect of an appreciation in the real effective exchange rate (REER) on real gross exports. At the same time, high FVA share also dampens the negative association between exports and increased REER volatility.

KEYWORDS:

• Global value chains
• exchange rate elasticity of exports
• exchange rate volatility
• ASEAN economies

JEL CLASSIFICATIONS:

• F14
• F15
• F31

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. As noted in Antras (2017, 5), a variety of terms have been used interchangeably to refer to this phenomenon: ‘production fragmentation’, ‘slicing the global value chains’, ‘vertical specialization’ and so on.

2. The choice of database is further discussed in Section 5.2.

3. See Bird and Rajan (2004) on the effects of exchange rate changes on the overall economy in a selected ASEAN economy, Thailand.

4. The effects might have also been delayed because of a switch of production from one country to another. We thank the referees for raising this point.

5. For the interest of space, the full results for these checks are not reported in this paper. They are provided upon request.