Results

Table 5 [ PDF 41.4KB | 1 page ] presents the results from estimating equation (3) using a DOLS(1,1) specification.⁸ Columns (1) and (2) report the findings including country-pair fixed effects and columns (3) and (4) report the findings including exporter and importer fixed effects.

The first row presents the coefficients on income. They are statistically significant in every case and vary from 2.41 to 3.08. These results indicate that a 1% increase in income abroad would raise computer exports by about 3%. The high values for the income elasticity reflect the fact that consumers are more likely to purchase high-tech goods such as computers as their incomes increase.

The second row reports the coefficients on the weighted exchange rate in supply chain countries. These coefficients are also statistically significant in every case and of the expected negative sign, indicating that an appreciation of wrer reduces processed exports. The values vary from -1.54 to -1.72, implying that a 10% appreciation among supply chain countries would reduce computer exports by about 16%.

The third row reports the coefficients on the exchange rate in assembly countries. These coefficients are not of the expected negative sign but are positive. In two cases they are also statistically significant. These results are sensitive to whether a time trend is included.

The fourth and fifth rows report values for the FDI stock and the WTO dummy variable. The coefficients are of the expected positive sign. As in the case of the bilateral exchange rate, however, the results are sensitive to whether a time trend is included.

Table 6 [ PDF 42.1KB | 1 page ] reports the results of estimating equation (3) excluding the exchange rate in supply chain countries. This is the traditional way of estimating export equations. The coefficients on income are again positive and statistically significant in every specification, and their values are again close to 3. The coefficients on the bilateral exchange rate are again sensitive to whether a trend term is included. The coefficients are of the expected (negative) sign and statistically significant when the time trend is excluded, but close to zero when the trend term is included.

Table 7 [ PDF 41.4KB | 1 page ] reports the results of estimating equation (3) excluding the exchange rate in assembly countries. In every specification, the coefficients on income remain positive and statistically significant and the coefficients on the exchange rate in supply chain countries remains negative and statistically significant.

The findings in Table 5 are robust to changing the number of leads and lags in the DOLS specification. In every case, the coefficient on income remains positive and statistically significant and the coefficient on the supplier's exchange rate remains negative and statistically significant.

The important implication of these results is that an appreciation in East Asian supply chain countries would produce a large drop in computer exports. This makes sense as the lion's share of the value-added of the final computers comes from supply chain countries.

On the other hand, there is no robust evidence that an appreciation in East Asian assembly countries would decrease computer exports. This also makes sense. If the value-added in an assembly country is 10%, then even under complete exchange rate pass-through, a 10% appreciation in an assembly economy would only raise the foreign currency price of computers by 1%. If exporters or distributors in the importing country absorb part of the exchange rate appreciation, the change in the prices paid by consumers in the importing country would be even less.

A second implication of the results presented here is that a decrease in income in the importing countries would cause a large drop in computer exports. This finding combined with the evidence in Table 4 that more than 70% of computer goods exports go outside of the region indicate that the 2008–2009 slowdown in the rest of the world is contributing to a large decrease in East Asian computer exports. The reduction in exports from the PRC and ASEAN countries in turn reduces the production of electronic components in East Asian supply chain countries, curtailing output and employment throughout the region. Because the US purchased one-third of the computers and office equipment exported from the PRC and ASEAN countries before the 2008–2009 crisis, the slowdown in the US economy is contributing significantly to the drop in computer exports from East Asia.

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