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Exchange Rate Risk and Trade Mode Choice in the Processing Trade: Evidence from Chinese Data

Zhe Chen, Junjie Hong and Xiaonan Sun

No 2019-09, AGI Working Paper Series from Asian Growth Research Institute

Abstract: This study investigates the impact of exchange rate fluctuations on trade mode choices among assembly firms. Using the Chinese Customs data from 2000 to 2006, we show that exchange rate pass-through (ERPT) depends on which entity is responsible for importing inputs. Relative to passively receiving inputs under pure assembly (PA) mode, foreign invested assembly firms mainly source inputs by themselves through import and assembly (IA) mode and enjoy lower ERPT by doing so. We then relate exchange rate fluctuations to processing mode choices and find that the share of import through PA increases with exchange rate volatilities. This effect is more pronounced for firms in liquidity constrained industries and is mitigated by better local financial development.

Keywords: exchange rate risk; trade mode choice; processing trade; financial constraint; F14; F23; F31 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-int and nep-tra
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Journal Article: Exchange rate risk and trade mode choice in processing trade: Evidence from Chinese data (2020) Downloads
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