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

Zhe Chen (), Junjie Hong and Xiaonan Sun

Review of International Economics, 2020, vol. 28, issue 2, 537-564

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.

Date: 2020
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https://doi.org/10.1111/roie.12462

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Working Paper: Exchange Rate Risk and Trade Mode Choice in the Processing Trade: Evidence from Chinese Data (2019)
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