Asia’s Supply Chain and Global Rebalancing

IMF Blog, May 11, 2011

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Much of the debate over global rebalancing has focused on the U.S.-China trade imbalance, but that misses the bigger picture created by cross-border supply chains.
Asian exporters have shifted from specializing in final goods to specializing in certain stages of production and becoming vertically integrated with each other.
As Asian economies rebalance their growth models, understanding how the regional supply chain affects exchange rates and shifts in global demand is critical.

Example: the iPad and its rising popularity in the United States.
- According to PC Magazine: "while final assembly is in China, most of the components seem to be actually manufactured in other Asian [economies]," including Korea, Japan, and Taiwan Province of China.
Assessing bilateral imbalances by looking only at end producers is misleading because an exporting country’s price competitiveness depends on both the value of its own currency and the value of its suppliers’ currencies.

China now accounts—directly or indirectly—for about half of all imports of intermediate inputs within Asia, a share that has doubled since 1995.
For many Asian trading partners, China has become the single most important destination of intermediate goods exports.
China accounts for 20-25 percent of all capital goods exports from Japan and Korea, a fourfold increase from a decade earlier.
China now accounts for nearly 30 percent of intermediate goods exports within Asia, up from 15 percent a decade earlier.
For all major Asian economies, Japan remains the second most important source of intermediate inputs after China.
Imported content in exports (value added terms) ranges from about 10 percent in Japan to 40 percent in the smaller open economies, such as Malaysia.
If production disruptions in Japan following the tragic earthquake and tsunami persist, say beyond the Fall, the resulting supply shortages could have significant spillovers to production elsewhere in Asia.

A more comprehensive approach to imbalances and exchange rates: the "integrated effective exchange rate."
- Builds on the conventional effective exchange rate (a weighted average of bilateral exchange rates with trading partners).
- The integrated exchange rate also factors in supplier economies’ exchange rate movements, reflecting the cost of imported intermediate inputs.
Examples:
- In the case of China, the integrated exchange rate has appreciated more slowly than the conventional one in recent years. Depreciation of currencies of China’s important supplier economies, in particular Korea, has dampened the rise of input costs for Chinese exports.
- Korea’s conventional effective exchange rate has depreciated by about 25 percent since the global financial crisis, but its integrated exchange rate has depreciated much less. Currencies of Korea’s key suppliers, including Japan, have appreciated and raised the cost of inputs in Korea’s exports.
- Japan’s integrated exchange rate tracks more closely the conventional one, reflecting the relatively high local content in Japanese exports.

Adjusting the U.S.-China trade imbalance to reflect the original suppliers of the imported inputs in China’s exports to the United States shows:
- China’s trade surplus to the U.S. shrinks.
- The trade surplus of most other Asian economies increases.
Implication: Asia’s high degree of vertical integration means a durable reduction in imbalances requires adjustment across all major Asian economies and currencies.

Source: Asia’s Supply Chain and Global Rebalancing (IMFBlog), Anoop Singh, May 11, 2011