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Exchange rate risk and trade mode choice in processing trade: Evidence from Chinese data

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  • Zhe Chen
  • Junjie Hong
  • Xiaonan Sun

Abstract

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.

Suggested Citation

  • Zhe Chen & Junjie Hong & Xiaonan Sun, 2020. "Exchange rate risk and trade mode choice in processing trade: Evidence from Chinese data," Review of International Economics, Wiley Blackwell, vol. 28(2), pages 537-564, May.
    • Handle: RePEc:bla:reviec:v:28:y:2020:i:2:p:537-564
    DOI: 10.1111/roie.12462
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    References listed on IDEAS

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    1. Mary Amiti & Oleg Itskhoki & Jozef Konings, 2014. "Importers, Exporters, and Exchange Rate Disconnect," American Economic Review, American Economic Association, vol. 104(7), pages 1942-1978, July.
    2. Emine Boz & Gita Gopinath & Mikkel Plagborg-Møller, 2017. "Global Trade and the Dollar," Working Paper 489661, Harvard University OpenScholar.
    3. Nicolas Berman & Philippe Martin & Thierry Mayer, 2012. "How do Different Exporters React to Exchange Rate Changes?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 437-492.
    4. Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2010. "Currency Choice and Exchange Rate Pass-Through," American Economic Review, American Economic Association, vol. 100(1), pages 304-336, March.
    5. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
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    Cited by:

    1. Zhe Chen & Yoshinori Kurokawa, 2022. "Do exporters respond to both tariffs and nominal exchange rates? Evidence from Chinese firm‐product data," Review of International Economics, Wiley Blackwell, vol. 30(2), pages 514-548, May.
    2. Liu Qing & Zhang Yanchao & Li Langxing & Li Shuaihang, 2021. "The Interactive Impact of Trade Policy Uncertainty and Credit Constraint Heterogeneity on Firms’ Export Margins: Theory and Empirics," Journal of Systems Science and Information, De Gruyter, vol. 9(6), pages 575-607, December.

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    More about this item

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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