Trade Patterns and Exchange Rates in East Asia

Abstract

This paper shows that East Asian trade pattern exhibits a dynamic shift in the regional value chain. Several developing Asian economies including China notably gained comparative advantage in the production and exporting of medium-and-high technology products. Japan and the NIEs further deepened their intra-regional comparative advantage across product lines. Nonetheless, the region significantly depends on final demands from the Americas and Europe. The build-up of an unsustainable payment imbalance in the US was substantially mirrored in the reserve accumulation by East Asian countries. Given that a disorderly unwinding of the imbalance is in progress amid the global financial crisis and a fear of prolonged recession, the present study examines how real exchange rate changes and a shift in relative demand will affect exports from the East Asian countries. The findings show that both the real exchange rate change and a shift in relative foreign income would significantly reduce exports from East Asia. The findings further show that with the value chain becoming increasingly fragmented along the production network, changes in the intra-regional exchange rates significantly affect their exports but in an asymmetric way. The implication is that the production network has called for a greater symmetry in their intra-regional real exchange rates. An arrangement whereby East Asian exchange rates converge to relative stability within the region but greater flexibility against others (particularly the US dollar and Euro) would itself be a mechanism for international adjustment.