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Exchange rate risk and trade mode choice in processing trade: Evidence from Chinese data
Author(s) -
Chen Zhe,
Hong Junjie,
Sun Xiaonan
Publication year - 2020
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12462
Subject(s) - exchange rate , mode (computer interface) , economics , monetary economics , exchange rate pass through , market liquidity , international economics , international trade , computer science , operating system
This study investigates the impact of exchange rate fluctuations on the trade mode choices of assembly firms. Using Chinese customs data, we show that exchange rate pass‐through (ERPT) depends on which party is responsible for sourcing inputs. Relative to passively receiving inputs under the pure assembly (PA) mode, foreign‐invested assembly firms mainly source inputs themselves through the import and assembly mode and enjoy lower ERPT. We find that the share of imports through PA increases with exchange rate fluctuations. This effect is more pronounced for firms in liquidity‐constrained industries and mitigated by better local financial development.