Intermediate trade in global value chains and its role in final demand, price and business cycle co-movement

This study assessed ASEAN-4 participation in regional value chain as downstream suppliers and their external trade relations with the upstream suppliers China and Japan. The first objective examines the relationship between final demand and intermediate imports at aggregated and disaggregated levels. Second objective assess the impact of a computed import price on intermediate imports, exchange rate pass through (ERPT) and elasticity of substitution (EOS). While the third objective compare the effect of intermediates trade on the business cycle co-movement between China–ASEAN-4 and Japan–ASEAN-4. Autoregressive Regressive Distributed Lag (ARDL) Bounds test was used for the first and third objective while the second objective used Panel ARDL technique for dataset from 1970 to 2015. Three main findings were extracted from the analysis. Firstly, the findings based on the first objective showed a positive impacts of final demand fluctuation on import of intermediates. Second objective analysis reveals that compared to the domestic price, import price was less significant in determining demand of intermediates import. Moreover, ERPT suggests that firms in ASEAN-4 tend to absorb the fluctuation in import prices and maintain domestic price stability. The findings from third objective indicates trade in intermediates is significant in influencing business cycle co-movement between downstream suppliers and upstream suppliers. The empirical results imply that a growing ASEAN-4 is likely to create more demand for intermediates within the region and thus policy that drive trade integration in the region is expected to benefit all. Moreover, import price is less significant in determining imports, thus implying competition on non-price factor in between domestic intermediates and imported intermediates. The result also reveals that more trade in intermediates will cause business cycle co-movement. Therefore, countries should formulate appropriate international trade policy by carefully evaluating the cost and benefits of value chain participation at the regional level.

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