Global Value Chain Participation and Firms' Responses to Exchange Rate Fluctuations

Abstract

Greater participation in global value chains (GVCs) has highlighted the impact of exchange rate shocks on international trade. This paper examines how such participation influences firms' responses to exchange rate movements, focusing on the relationship between firms' pricing and value-added in exports. This study, using detailed Chinese firm-level data, demonstrates that firms with a high degree of GVC participation reacted to currency appreciation by lowering their export prices more substantially and reducing their export volumes less. This is mainly attributable to the “cost-hedging effect” within the marginal cost channel and the “pricing inhibition effect” within the markup channel. By categorizing export firms by trade models and product types, this study further demonstrates that processing trade firms at the low end of the value chain and those with low product differentiation were more inclined to absorb exchange rate shocks. This study adds to the existing theoretical framework and provides strong evidence for China in deepening GVC integration and supporting the development of high-quality export firms.