Trade, Production Networks and the Exchange Rate

This paper examines the effect of cross-border production sharing on trade and exchange-rate behavior. When a country's exports contain imported components, changes in exchange rates tend to have offsetting effects on imports and exports. Imports may fall, remain unchanged or even rise with depreciation, depending on the share of domestic value-added in exports. The effect of domestic and foreign GDP on imports and exports is also altered by production sharing. These behavior patterns are identified in trade in motor vehicles between the United States and Mexico with the aid of OLS and VEC techniques.