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The role of processing trade in exporters' responses to exchange rate: Evidence from China
Author(s) -
Xie Yiqing,
Song Chao
Publication year - 2020
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12909
Subject(s) - economics , exchange rate , international economics , tariff , china , international trade , trade barrier , commercial policy , developing country , industrialisation , monetary economics , political science , law , market economy , economic growth
Processing trade is an important exporting mode for many countries developed by the export‐oriented industrialisation such as 1960s Japan, 1990s Korea and 2000s China. Exporters who rely on processing trade for foreign profits do not enjoy much market power, and hence care more about exchange rate changes. We develop a model to illustrate how processing trade affects exporters' responses to exchange rate fluctuations. The model suggests that the elasticity of export price with respect to exchange rate for processing‐trade exporters is greater than that of the ordinary‐trade exporters, while the elasticity of export quantity of processing‐trade exporters is smaller compared to their ordinary‐trade counterparts. Most developing countries' governments offer processing‐trade exporters better tax/tariff reduction policy to encourage exporting, which grants processing‐trade exporters additional advantage to adjust more on export price and less on quantity when facing changes in exchange rate and therefore causes their different responses to exchange rate fluctuations. We find strong empirical supports by studying the data from China, which is the largest developing country and biggest processing‐trade exporter.