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For details of the analysis, read the captioned Discussion Paper. Views expressed in this Non Technical Summary are solely those of the individual author(s), and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI). International Macroeconomics Program (FY2011-FY2015) East Asian Production Network and Global Imbalances Project China's trade surplus is entirely in processing trade. Processed exports are final goods produced using parts and components coming from East Asian supply chain countries. Many have argued that because much of the value added of China's processed exports comes from East Asian countries, exchange rates in supply chain countries should affect China's processed exports while the renminbi should not. This paper investigates these issues by considering the two main subcategories of processed exports: processing and assembly (PAA) exports and processing with imported materials (PWIM) exports. Figure 1a shows that the lion's share of the value of PAA exports comes from PAA imports that are produced in supply chain countries. Figure 1b shows that a substantial gap has opened up between the value of PWIM exports and PWIM imports, indicating that much of the value added of PWIM exports comes from China. In addition, since PWIM imports are large, much of the value added of PWIM exports also comes from supply chain countries. Evidence presented in this paper indicates that East Asian exchange rates affect both types of exports and that the renminbi significantly affects PWIM exports but not PAA exports. These results are what one would expect since supply chain countries contribute most of the value added to PAA exports and since both China and supply chain countries contribute substantially to the value added of PWIM exports. Since PWIM exports are now six times the value of PAA exports, these results indicate that the renminbi matters for total processed exports (i.e., the sum of PAA and PWIM exports). While exchange rates in both China and other East Asian countries thus matter, there is little discussion between East Asian policy makers on exchange rate issues. This lack of official interaction contrasts with the intensive private sector integration occurring within regional production networks. East Asian government officials should begin a dialogue behind closed doors on exchange rate issues. This discussion could include the problems of further reserve accumulation, the desirability of a joint appreciation relative to the U.S. dollar, and ways to limit exchange rate volatility in the region. Hopefully, these behind the scenes interactions by economists and trained officials could point to a vision of how exchange rate policy in the region should evolve. FIGURE 1a Value of China's Processing and Assembly (PAA) Exports and Imports, 1993-2011 Source: CEIC Database Note: Values for 2011 are estimates based on data for the first 8 months of 2011 FIGURE 1b Value of China's Processing with Imported Materials (PWIM) Exports and Imports, 1993-2011 Source: CEIC Database Note: Values for 2011 are estimates based on data for the first 8 months of 2011 Research/Policy Papers Discussion Papers (English) Discussion Papers (Japanese) Policy Discussion Papers (English) Policy Discussion Papers (Japanese) Technical Papers (English) Technical Papers (Japanese) Non Technical Summaries List of Articles Published in Peer-reviewed Academic Journals Research Digest Links Discussion Papers Search Communications Newsletter RSS Feed Facebook X YouTube Research Areas Research Programs (FY2024-2028) Research Programs (FY2020-2023) Research Programs (FY2016-2019) Research Programs (FY2011-2015) Policy Research Domains (FY2006-2010) Projects Survey Fellows Research/Policy Papers Discussion Papers (English) Discussion Papers (Japanese) Policy Discussion Papers (English) Policy Discussion Papers (Japanese) Technical Papers (English) Technical Papers (Japanese) Non Technical Summaries List of Articles in Journals Research Digest Discussion Papers Search Publications RIETI Books (English) RIETI Books (Japanese) History of Japan's Trade and Industry Policy Authors' Words Other Publications (English) Other Publications (Japanese) Events Symposiums Workshops BBL Seminars Archived Seminar Series Data JIP Database R-JIP Database CIP Database Industry-Specific Nominal and Real Effective Exchange Rates AMU and AMU Deviation Indicators JSTAR RIETI-TID RIETI FDI Database ICPA Project Links Articles Column Special Series Newspapers & Magazines Fellows' Works VoxEU Column From IZA Perspectives from Around the World Other Contents RIETI Report Policy Update Keizai Sangyo Journal (METI Journal) About RIETI Privacy Policy Site Policy Site Map Help Contact METI Web Site Research Institute of Economy, Trade and Industry, IAA (JCN 6010005005426)JCN: Japan Corporate Number Opinions expressed or implied on this website are solely those of the author, and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI).Titles, numbers, specific names, etc. on this website are as of the date of publication. 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