Abstract
The study investigates a predictive exchange rate effect on value-added trade flows on global value chains. We theoretically review the role of exchange rates on international trade based on insular, open, and global value chained economies. This paper empirically confirms a retro forecasting rule of the exchange rate on exports and trade balance using the value-added data for the period from 1995 to 2015. The first result is that real effective exchange rates have predictive elasticity information for the value-added trade flows. The second is that exchange rates have two practical effects on trade flows. The value-added exchange rate hurts the value-added trade balance due to increased intermediate trades, but the exchange rate has a positive effect on the gross trade balance. We would expect that value-added exports with trade balance can be improved in all sample countries when the value-added exchange rate is increasing. The main contribution is further evidence on distinguishing the currency depreciation on the value-added trade from the depreciation on the gross trade to achieve higher growth.
Highlights
Recent advances in international trade statistics show where value-added is created along global value chains (GVCs)
This study evaluates the predictive effect of the exchange rate on the value-added trade balance and assesses possible policy implications using a sample of yearly trade figures spanning the period from 1995 to 2015 focused on the current GVCs state of the literature concerning the effects of exchange rate movements on the trade balance
The evidence is consistent with the asset market literature on how the determination of exchange rates establishes a direct relationship between changes in the exchange rate and the current account or trade balance account
Summary
Recent advances in international trade statistics show where value-added is created along global value chains (GVCs). GVCs trade represents around 70% of all global trade. By this fact, we must consider trade flows in value-added to avoid a double-counting problem in gross trade flows raised from increased intermediate goods trades. In the sense of value-added perspectives, we can distinguish the value-added real effective exchange rate (VAREER) and discuss the role of VAREER on value-added trade flows, which will contribute to sustainable world free trade. The traditional approach assures a positive effect of exchange rate changes on gross trade balance, where Ricardo and Heckscher-Ohlin assumed the endogenous exchange rate to trade balance. The absorption approach shows that trade balance will improve if domestic output growth exceeds absorption in response to domestic depreciation, assuming that trade balance is a function of real income and absorption, which is endogenous to the exchange rate
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