Exchange Rate and Domestic Value Added in Processing Exports: Evidence from Chinese Firms
Xiaomin Cui Miaojie Yu 
1st Aug 2018
This paper studies the effect of the exchange rate on the domestic value-added ratios of processing exports via two channels: substitution and markup. First, home currency depreciation leads to an increase in domestic value-added ratios through affecting each firm’s imported and domestic intermediate inputs (the substitution channel). Second, home currency depreciation improves exporters’ profitability and results in higher domestic value-added ratios of processing firms (the markup channel), as exports become more competitive with depreciation. Using Chinese firm-level production data and product-level trade transaction data, our corresponding empirical analysis finds that processing firms’ domestic value-added ratios increase significantly through the two channels in response to firm-level nominal effective exchange rate depreciation. The markup channel contributes almost 39 percent of the variation in domestic value-added ratios in response to changes in the exchange rate.
Keywords: Exchange Rate, Markups, Domestic Value-added Ratios
JEL: F14 F31 O11