Exchange Rate, Exports, and Product Complexity: An Analysis of China’s Export of Products with Different Sophistication Levels

Activity: SupervisionPhD Supervision


The industrialization and development path of East Asia is well explained by the flying geese paradigm (Akamatsu, 1962) in which Japan as the leader has become the technological frontier in the region. The development path of Japan has been followed by other economies in the region, including China. We show that this pattern can be elucidated by using the concept of product space (Hidalgo and Hausmann, 2009). Product space analysis indicates that China’s export basket is transformed from primary industries, such as natural resources and agricultural products, to simple manufacturing industries, such as textiles and footwear. It is finally elevated to relatively more sophisticated products such as electronic products. This successful upgrade of China’s export basket facilitates China’s exports to become less vulnerable to exchange rate fluctuations.
With this background, we investigate whether changes in exchange rate exert heterogeneous effects on China’s exports, depending on their sophistication levels, as measured by the product complexity index (PCI). We estimate the exchange rate effects and exchange rate elasticities for 1,242 export categories disaggregated at the HS 4-digit level from 1995 to 2018 by using bilateral trade data between China and 190 partner economies. Results indicate that exchange rate changes affect the most sophisticated exports the least and least sophisticated exports the most. We offer exchange rate effect estimations for different time periods of China’s export basket. The evidence also indicates that as China has upgraded its export basket, the effect of exchange rates on exports has become trivial after 2013. Therefore, exports can be more stable if China’s export basket contains more high-technology goods.
Further, we estimate the exchange rate effects and exchange rate elasticities of 44 Information and Communication Technology (ICT) HS 4-digit export categories in China, which are included in Attachment A for the World Trade Organization (WTO) Information Technology Agreement (ITA) by employing high-dimensional fixed effects. Our findings regarding the diminished effects of exchange rate changes on more sophisticated products are robust for ICT products. We also offer an estimate of the exchange rate effect for individual ICT products and an in-depth analysis of the telecommunications industry in China. The result indicates that the exchange rate effect for individual ICT products is not only affected by its sophistication level but also by other factors that require further examination in future research.
We contend that our findings and conclusions provide important policy implications in terms of exchange rate practices and industrial policies in China.
Period1 Nov 201821 Jul 2022
ExamineeChen Chen
Examination held at
Degree of RecognitionInternational