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WORLD ECONOMIC OUTLOOK: ADJUSTING TO LOWER COMMODITY PRICES
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International Monetary Fund | October 2015
In general, increased participation in global value
chains could lower the effects of exchange movements
on trade prices and of trade prices on trade volumes.
At the same time, although trade related to global
value chains has grown in recent decades, the bulk
of global trade still consists of conventional trade. In
addition, as already mentioned, the average increase
in the share of foreign value added in exports has
generally been gradual and has recently slowed. 周us,
the rising share of foreign value added is unlikely
to have dramatically reduced the responsiveness of
gross exports and imports to exchange rates for most
countries. 周e overall evidence regarding a rising
disconnect between exchange rates and trade, which
reflects not only the rise of global value chains but
also other factors, is assessed later in the chapter. 周at
analysis does not suggest a general weakening of the
relationship between exchange rates, trade prices, and
total trade volumes.
However, beyond the implications of global value
chains for the relationship between overall gross trade
flows and exchange rates, increased participation in
value chains may have a bearing on the relationship
between exchange rates and trade in global-value-
chain-related goods. Box 3.1 assesses the evidence. In
particular, it estimates the relationship between trade
in global-value-chain-related goods and real effec-
tive exchange rates. It finds that a real appreciation
of a country’s currency not only reduces its exports
of domestic value added, but also lowers its imports
of foreign value added (in contrast to the traditional
rise in imports following currency appreciation). 周is
latter result is consistent with the notion that global-
value-chain-related domestic and foreign value added
are complements in production.38 So producing and
exporting less domestic value added would also reduce
the derived demand for imported foreign value added.
In addition, the analysis finds that the magnitudes of
import and export elasticities depend on the size of a
country’s contribution to global value chains—smaller
domestic contribution of value added tends to dampen
the response to exchange rate changes (see Cheng
38It is important to keep a macroeconomic perspective on this
issue. Input substitution for product categories or some industries
may rise. Generally, however, once a firm arranges production pro-
cesses with a foreign supplier, it may well continue working with the
supplier for some time to recoup sunk costs of moving production
abroad. A generally low degree of substitutability between domestic
and foreign input suppliers could thus be expected.
and others, forthcoming; and IMF 2015a, 2015b,
2015c).39
Finally, the rise of global value chains has implications
for competitiveness assessments. As already mentioned,
in a value chain, the cost of producing an economy’s
goods as well the demand for them can depend on
the exchange rates of economies that are not among
the economy’s direct trading partners. 周us, the real
effective exchange rate relevant for competitiveness
assessments not only needs to include the country’s
direct trading partners but must also take into account
all participants in the value chain, including the final
consumers. Such a measure, the so-called value-added
real effective exchange rate, is described in Box 3.2. 周is
measure depends on the final destinations of exported
domestic value added, and it accounts for product
substitutability in demand and production. As Box 3.2
reports, a number of economically important differences
arise between value-added real effective exchange rates
and conventional real effective exchange rates. However,
overall, the two measures are strongly correlated, in part
because the vast majority of trade does not consist of
global-value-chain-related trade.40
Overall, the evidence suggests that, for economies
that have become more deeply involved in global value
chains, trade in global-value-chain-related products
has become less strongly responsive to exchange rate
changes. At the same time, although global-value-
chain-related trade has gradually increased through
the decades, the relative pace of its expansion appears
to have decelerated in recent years, and the bulk of
global trade still consists of conventional trade. 周e
rise of global value chains is thus unlikely to have
39Consistent with this result, Ahmed, Appendino, and Ruta (2015)
find that the response of gross exports of manufactured goods to real
exchange rate movements is weaker in economies with a higher share
of foreign value added in gross exports, and Ollivaud, Rusticelli, and
Schwellnus (2015) find that the elasticity of the terms of trade to the
exchange rate is weaker in such economies. In related work based on
firm-level data, Amiti, Itskhoki, and Konings (2014) find that import-
intensive exporters have significantly lower exchange rate pass-through
to their (foreign currency) export prices. Eichengreen and Tong (2015)
find that renminbi appreciation has a positive effect on the stock mar-
ket valuation of firms in sectors exporting final goods to China, with
a negligible effect on those providing inputs for China’s processing
exports. 周e IMF (2015d) provides additional evidence, using data for
Singapore, that products that have a higher foreign-value-added share
respond more weakly to relative export prices.
40周is observation also suggests that biases in estimated value-
added trade relations due to incorrect use of standard real effective
exchange rates could be small. 周e same implication applies to the
estimation of gross trade relations based on value-added real effective
exchange rates.