Introduction

Since 1994, the leading export category from East Asia to the rest of the world has been computers and office equipment. These goods are produced within regional production and distribution networks. Japan; the Republic of Korea (hereafter Korea); and Taipei,China construct sophisticated technology-intensive parts and components and ship them to the People's Republic of China (PRC) and the Association of Southeast Asian Nations (ASEAN) countries for processing by lower-skilled workers. The assembled computers are then exported throughout the world.

This slicing up of the value-added chain involves complicated combinations of intra-firm trade, arms-length transactions, and outsourcing (Kimura and Ando 2005). The resulting production networks allow firms to divide production processes into fragmented blocks that can be allocated across countries based on differences in factor endowments (Fukao, Ishido, and Yoshiike 2003).

Within these networks, Japan; Korea; and Taipei,China primarily produce high-tech parts and components and the PRC, Malaysia, the Philippines, and Thailand primarily perform lower-skilled assembly operations. Rasiah (2009) reported that skill and research and development intensity levels in the electronics industry are often much higher in Korea and Taipei,China than in ASEAN member countries. Austria (2008) found that the PRC and ASEAN countries focus on the labor-intensive assembly of electronics goods, and that original equipment manufacturing and original brand manufacturing activities take place in other, more advanced Asian economies.

Because factories in the PRC and ASEAN country perform primarily low-skilled assembly operations, little of the value-added in the electronics industry comes from these countries. Koopman, Wang, and Wei (2008) reported that the PRC's value-added in the computer industry is small. Using mathematical programming techniques and detailed data from trade statistics and input-output tables they found that PRC value-added in electronic computers is less than 5%. Agarwalla (2005) reported that the Philippines' value-added in the electronics industry is also small. In a comprehensive study, he finds that the local value-added is less than 15%. Austria (2008) similarly concluded based on a detailed analysis of import and export data that ASEAN's electronics exports are highly import-dependent and that domestic value-added is minimal.

Koopman, Wang, and Wei (2008) noted that in cases like this where the share of domestic content in exports is small, the effect of exchange rate changes in assembly countries on trade volumes will also be small. Yoshitomi (2007) similarly argued that a unilateral appreciation in East Asian assembly countries would not affect processed exports much. Because most of the value-added of processed goods comes from other countries in the region, he states that a joint appreciation throughout East Asia would cause a much larger decrease in sophisticated high-tech exports from assembly countries.

This paper investigates how computer exports from East Asia are affected by exchange rate changes in assembly countries and in countries supplying the technologically-sophisticated intermediate inputs used to assemble computers. To do this, the paper employs both the bilateral exchange rate between assembly countries and importing countries and a tradeweighted exchange rate between countries supplying parts and components to assembly countries and countries importing final computers from assembly countries.

The results indicate that exchange rate appreciations in East Asian supplier countries would cause a large decrease in computer exports from the region but that exchange rate appreciations in assembly countries would not. The results also indicate that a recession in the rest of the world would curtail computer exports.

These findings provide guidance for East Asian policymakers seeking to promote recovery from the 2008–2009 economic crisis. If the slowdown in the rest of the world is protracted, then computer exports will no longer be able to play the same role as an engine of growth. In addition, if the United States (US) dollar depreciates against Asian currencies in the medium run, computer exports will decline further.¹

This evidence thus provides impetus to attempts in East Asia to promote domestic and regional demand. For instance, improving health care, education, and pension systems may stimulate spending in East Asia by reducing precautionary saving. In addition, improving infrastructure and reducing intra-regional impediments to trade can promote growth and development. If income and spending in East Asia increase, the region will be better able to weather a decrease in exports to the rest of the world.

The next section presents the data and methodology. The third section contains the results of the study. The fourth section concludes.

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