The Impact of Exchange Rate Changes on GVC Participation and Positioning

【Authors】

ZHU Chao, XU Longqiang & YI Zhen

【WorkUnit】

Capital University of Economics and Business, 100070

【Abstract】

China’s participation in Global Value Chain （GVC） has entered a phase of deep adjustment and is showing new trends. Since the establishment of the GVC division system in the 1970s, China has leveraged its comparative advantages to become the world’s largest commodity exporter. However, within the GVC production system dominated by developed countries, Chinese enterprises remain predominantly engaged in relatively low-value-added production stages, reflecting a challenge of “deep but not refined” participation in GVC.
This paper investigates whether financial variables, such as exchange rates, can complement trade factors in promoting GVC participation. While exchange rate changes simultaneously and proportionally affect import and export prices, rendering them theoretically neutral to the location of GVC participation, this study examines whether and how exchange rates can influence the rise of GVC participation.
This paper first constructs an open-economy model including GVC production dynamics and discusses the impact of exchange rate changes. The theoretical model shows that local currency appreciation reduces GVC participation through price changes. In addition, exchange rate changes affect the business decisions of import-export enterprises, altering intermediate processing behavior, thus affecting the positioning of firms within GVC.
Subsequently, this paper verifies the theoretical findings using sample data at the global industry level from 2000 to 2021. Exchange rate changes alter GVC participation by affecting the quantity and quality of imported and exported products. Local currency appreciation leads to a decrease in GVC participation depth but an increase in participation position. For China, on average, a 1% appreciation of the RMB exchange rate reduces China’s GVC participation ranking by one place over 5.4977 years but enhances its participation position by one place in about 4.5693 years.
Exchange rate changes have asymmetric impacts on GVC. During periods of exchange rate depreciation, GVC are more sensitive to exchange rate changes. When the sample is divided into four groups: high depreciation, low depreciation, high appreciation, and low appreciation, hedging behavior by enterprises is observed, leading to a convergence in the marginal effects of exchange rates on GVC.

JEL: F1, F14, F31

【KeyWords】

Global Value Chain, Exchange Rates, Trade Gains