Impact of exchange rates on ASEAN's trade in the era of global value chains: An empirical assessment

Exchange rate risk remains a key concern for export-oriented economies in Southeast Asia. Traditionally, export performance is thought to be adversely affected by exchange rate appreciation and high exchange rate volatility. Nonetheless, in the context of global value chains where export production relies heavily on imported inputs, the trade effects of exchange rate may be weakened. Using the OECD-WTO Trade in Value-added (TiVA) database, this paper seeks to tease out the association between exchange rate movements, volatility and aggregate exports of goods and services among ASEAN economies. More importantly, it investigates whether integration into GVCs affects these relationships. Applying panel regression techniques to a sample of eight ASEAN countries over the period 1995–2011, we found that high share of foreign value added (FVA) embodied in exports almost completely offsets the negative effect of an appreciation in the real effective exchange rate (REER) on real gross exports. At the same time, high FVA share also dampens the negative association between exports and increased REER volatility.