Investigating the effect of exchange rate changes on china’s processed exports

Many argue that the renminbi needs to appreciate to rebalance China’s trade. However, empirical evidence on the effects of an RMB appreciation on China’s exports has been mixed for the largest category of exports, processed exports. Since much of the value-added of these goods comes from parts and components produced in Japan, South Korea, and other East Asian supply chain countries, it is important to control for exchange rate changes in these countries. Employing DOLS techniques and quarterly data, this paper finds that exchange rate appreciations across supply chain countries would cause a much larger drop in processed exports than a unilateral appreciation of the RMB.