Register  |  Login  |  Inquiries  |  Sitemap |  
Advanced Search
Journal of Economic Integration 2013 June;28(2) :241-268.
Exchange Rate Devaluation and Reshuffling of Global Jobs

Luca Macedoni Fabio Sdogati 

University of California, Davis, U. S. A.
Politecnico di Milano, Milano, Italy
Corresponding Author: Luca Macedoni ,Tel: +01 5306016147, Email:
Copyright ©2013 Journal of Economic Integration
Current debates presume that devaluation of one country’s currency may transfer the production of imported intermediate goods to the devaluating country. This paper argues that in a global production network involving more than two countries in the production of fragments, this presumption may not hold. With a simple Ricardian model of fragmentation, this paper shows that the production of fragments can be transferred only if countries have close comparative advantage. Using data from the World Input Output Database, our model is found to be empirically supported.

JEL Classification
F10: General
Keywords: International Fragmentation of Production | Exchange Rate
1. Amighini, A. (2005). China in the international fragmentation of production: Evidence from the ICT industry. The European Journal of Comparative Economics, 2(2), 203–219.
2. Ando, M. (2006). Fragmentation and vertical intra-industry trade in East Asia. The North American Journal of Economics and Finance, 17(3), 257-281.
3. Antràs, P., Garicano, L., & Rossi-Hansberg, E. (2005). Offshoring in a knowledge economy. Quarterly Journal of Economics.
4. Athukorala, P.-chandra. (2005). Product Fragmentation and Trade Patterns in East Asia. Asian EconomicmPapers, 4(3), 1–27. MIT Press.
5. Autor, H. D., Levy, F., & Murnane, R. (2003). The skill content of recent technological change: An empiricalmexploration. The Quarterly Journal of, (November), 1279-1333.
6. Baldone, S., Sdogati, F., & Tajoli, L. (2007). On some effects of international fragmentation of production on comparative advantages, trade flows and the income of countries. The World Economy, 30(11), 1726–1769.
7. Baldone, S., Sdogati, F., & Tajoli, L. (2001). Patterns and determinants of international fragmentation of production: Evidence from outward processing trade between the EU and Central Eastern European countries. Weltwirtschaftliches Archiv, 137(1), 80-104.
8. Baldwin, R. (2009). Integration of the North American economy and new-paradigm globalization. Working Paper Series 049 - Policy Research Initiative - Government of Canada, (September). Policy Research Initiative (PRI).
9. Baldwin, R., & Venables, A. (2010). Relocating the Value Chain: Offshoring and Agglomeration in the Global Economy (pp. 0-34).
10. Bird, G., & Rajan, R. S. (2004). Does devaluation lead to economic recovery or contraction? Theory and policy with reference to Thailand. Journal of International Development, 16(2), 141-156.
11. Buffie, E.F.(1986). Devaluation and Imported Inputs: The Large Economy Case. International Economicm Review, 27(1), 123–140. JSTOR.
12. Chang, W.W., & Mayer, W. (1973). Intermediate goods in a general equilibrium trade model. International Economic Review, 14(2), 447–459. JSTOR.
13. Cheung, Y.W., Chinn, M.D., & Fujii, E. (2007). The overvaluation of renminbi undervaluation. Journal of International Money and Finance, 26(5), 762–785. Elsevier.
14. Cline, W.R., & Williamson, J. (2008). Estimates of the equilibrium exchange rate of the renminbi: is there a consensus and, if not, why not? Exchange Organizational Behavior Teaching Journal, (2006), 131–54.
15. Costinot, A., Vogel, J., & Wang, S. (2011). An Elementary Theory of Global Supply Chains. NBER.
16. Das, S. P. (1980). Traded Intermediate Products, and the Theory of Devaluation. International Economic Review, 21(2), 317–330. JSTOR.
17. Deardorff, A.V. (1979). Weak links in the chain of comparative advantage. Journal of International Economics, 9(2), 197–209. Elsevier.
18. Deardorff, A.V. (2001). Fragmentation in simple trade models. The North American Journal of Economics and Finance, vol. 12(2), pages 121-137, July. Elsevier
19. Dixit, A.K., & Grossman, G.M. (1982). Trade and protection with multistage production. The Review of Economic Studies, 49(4), 583. Oxford University Press.
20. Dornbusch, R., Fischer, S., & Samuelson, P. A. (1977). Comparative advantage, trade, and payments in a Ricardian model with a continuum of goods. The American Economic Review, 67(5), 823–839. JSTOR.
21. Durkin Jr, J. T., & Krygier, M. (2000). Differences in GDP per capita and the share of intraindustry trade: The role of vertically differentiated trade. Review of International Economics, 8(4), 760–774.
22. Escaith, H., & Gonguet, F. (2009). International Trade and Real Transmission Channels of Financial Shocks in Globalized Production Networks. World Trade Organization Staff Working Paper, (May), 1-32.
23. Ethier, W.J. (1979). Internationally decreasing costs and world trade. Journal of International Economics, 9(1), 1–24. Elsevier.
24. Ethier, W.J. (1982). National and international returns to scale in the modern theory of international trade. The American Economic Review, 72(3), 389–405. JSTOR.
25. Ethier, W.J. (2005). Globalization, globalisation: trade, technology, and wages. International Review of Economics & Finance.
26. Fair, R. (2010). Estimated macroeconomic effects of a Chinese yuan appreciation. Business Economics.
27. Feenstra, R.C., & Jensen, J. B. (2009). Evaluating Estimates of Materials Offshoring from US Manufacturing. Conference on Measurement Issues Arising from the Growth of Globalization, Washington, DC.
28. Feenstra, Robert C, & Hanson, G. H. (2008). Globalization , Outsourcing , and Wage Inequality. Review Literature And Arts Of The Americas, 86(2).
29. Feenstra, Robert C, Hanson, G. H., & Swenson, D. L. (1999). Offshore Assembly from the United States : Production Characteristics of the 9802 Program by. Program, (June).
30. Feldstein M. (2011). China’s New Currency Policy. Project Syndicate.
31. Findlay, R., & Rodriguez, C. A. (1977). Intermediate imports and macroeconomic policy under flexible exchange rates. Canadian Journal of Economics, 10(2), 208–217. JSTOR.
32. Foster, N., Stehrer, R., & de Vries, G. (2011). Patterns of net trade in value added and factors, (225).
33. Fukao, K., Ishido, H., & Ito, K. (2003). Vertical intra-industry trade and foreign direct investment in East Asia. Journal of the Japanese and International Economies, 17(4), 468–506. Elsevier.
34. Gabrisch, H., & Segnana, M. L. (2008). Vertical and horizontal patterns of intra-industry trade between EU and candidate countries. Dynamic capabilities between firm organization and local systems of production, 37(7), 324. Taylor & Francis.
35. Gamberoni, E., Lanz, R., & Piermartini, R. (2010). Timeliness and Contract Enforceability in Intermediate Goods Trade. WTO.
36. Grossman, G.M.& Rossi-Hansberg, E. (2006). The rise of offshoring: it’s not wine for cloth anymore. The New Economic Geography:
37. Grossman, G.M.& Rossi-Hansberg, Esteban(2011). Task trade between similar countries. Policy Research Working Paper Series 5819, The World Bank.
38. Grossman, G.M.&Rossi-Hansberg, E. (2008). Trading Tasks: A Simple Theory of Offshoring. American Economic Review, 98(5), 1978-1997.
39. Guisinger, S.E. (1969). Negative Value Added and the Theory of Effective Protection. The Quarterly Journal of Economics, 83(3), 415. Oxford University Press.
40. Gylfason, T.& Schmid, M. (1983). Does Devaluation Cause Stagflation? The Canadian Journal of Economics, 16(4), 641.
41. Hanson, J. A. (1983). Contractionary devaluation, substitution in production and consumption, and the role of the labor market. Journal of International Economics, 14(1-2), 179–189. Elsevier.
42. Helg, R., & Tajoli, L. (2005). Patterns of international fragmentation of production and the relative demand for labor. The North American Journal of Economics and Finance, 16(2), 233-254.
43. Hijzen, A., Görg, H. & Hine, R. C. (2005). International Outsourcing and the Skill Structure of Labour Demand in the United Kingdom. The Economic Journal, 115(506), 860–878.
44. Hummels, D.L., Ishii, J. & Yi, K.M. (1999). The Nature and Growth of Vertical Specialization in World Trade. SSRN Electronic Journal.
45. Johnson, R.C. & Noguera, G. (2011). Accounting for intermediates: Production sharing and trade in value added. World, 1-40.
46. Jones, R.W. & Sanyal, K.K. (1982). The theory of trade in middle products. The American Economic Review, 72(1), 16–31. JSTOR.
47. Jones, R.W. & Kierzkowski, H. (1990). The Role of Services in Production and International Trade: A Theoretical Framework,” in Ronald W. Jones and Anne O. Krueger, eds., The Political Economy of International Trade: Essays in Honor of Robert E. Baldwin, Cambridge, MA: Blackwell, pp. 31-48
48. Jones, R.W., Kierzkowski, H.& Lurong, C. (2005). What does evidence tell us about fragmentation and outsourcing? International Review of Economics & Finance, 14(3), 305-316.
49. Kohler, W. (2001). A specific-factors view on outsourcing. The North American Journal of Economics and Finance, 12(1), 31–53. Elsevier.
50. Krugman, P. (2010). Taking on China. New York Times, 14, 2010-2011.
51. Lamy, P. (2011). “ Made in China ” tells us little about global trade. Financial Times, WTO - Made in the World, 24.
52. Leamer, E.E.& Storper, M. (2001). The economic geography of the internet age. Journal of International Business Studies (pp. 1-37).
53. Leunig, B.T. (2011). “ Reshoring ” jobs from China won ’t happen. Financial Times, 21-22.
54. Marjit, S. (1987). Trade in intermediates and the colonial pattern of trade. Economica, 54(214), 173–184. JSTOR.
55. Marquez, J.& Schindler, J. (2007). Exchange-rate Effects on China ’ s Trade *. Review Literature And Arts Of The Americas, 15(5), 837-853.
56. Marsh, B.P. (2011). China labour costs push jobs back to US. Financial Times, 4-5.
57. McKinnon, R.I. (1966). Intermediate products and differential tariffs: A generalization of Lerner’s symmetry theorem. The Quarterly Journal of Economics, 80(4), 584. Oxford University Press.
58. McKinnon, R.I. & Schnabl, G. (2004). The East Asian Dollar Standard, Fear of Floating, and Original Sin. Review of Development Economics, 8(3), 331-360.
59. Melecky, M. (2008). A Structural Investigation of Third-Currency Shocks to Bilateral Exchange Rates. International Finance, 11(1), 19–48. Wiley Online Library.
60. Melvin, J. (1969). Intermediate Goods in Production Theory: The Differentiable Case. The Review of Economic Studies, 36(1), 124-131.
61. Ng, F., & Yeats, A. (2001). Production sharing in East Asia: who does what for whom, and why? Global production and trade in East Asia, 63–109. Boston: Kluwer Academic Publishers.
62. Ng, E.C.Y.(2010).Production fragmentation and business-cycle comovement. Journal of International Economics, vol. 82(1), pages 1-14, September, Elsevier.
63. Nordås, H.K. (2006). International production sharing: a case for a coherent policy framework. Time. World Trade Organization.
64. Rowthorn, B.& Ramaswamy, R. (1997). Deindustrialization: causes and implications. International Monetary Fund.
65. Saeger, S. (1997). Globalization and Deindustrialization: Myth and Reality in the OECD. Review of World Economics.
66. Sanyal, K.K. (1983). Vertical Specialization in a Ricardian Model with a Continuum of Stages of Production. Economica, 50(197), 71.
67. Sarkar, A. (1985). A model of trade in intermediate goods. Journal of International Economics, 19(1-2), 85–98. Elsevier.
68. The Economist(2011). Moving back to America. pp. 1-2.
69. Thorbecke, W. & Smith, G. (2010). How Would an Appreciation of the Renminbi and Other East Asian
70. Currencies Affect China’s Exports? Review of International Economics, 18(1), 95–108. Wiley Online Library.
71. Thorbecke, W.& Zhang, H. (2009). The Effect of Exchange Rate Changes on China’s Labor-Intensive Manufacturing Exports. Pacific Economic Review, 14(3), 398–409.
72. Türkcan, K.& Ates, A. (2011). Vertical Intra-industry Trade and Fragmentation: An Empirical Examination of the US Auto-parts Industry. The World Economy, 34(1), 154-172.
73. Vanek, J. (1963). Variable factor proportions and interindustry flows in the theory of international trade. The Quarterly Journal of Economics, 77(1), 129. Oxford University Press.
74. WTO; IDE-JETRO. (2011). Trade patterns and global value chains in East Asia: from trade in goods to trade in tasks.
75. Warne, R.D. (1971). Intermediate goods in international trade with variable proportions and two primary inputs. The Quarterly Journal of Economics, 85(2), 225. Oxford University Press.
76. Westerlund, J. & Edgerton, D.L. (2007). New Improved tests for cointegration with structural breaks. Journal of Time Series Analysis, 28(2), 188–224. Wiley Online Library.
77. Wu, Y. (2010). Exchange Rates and Prices under Processing Trade: A Macroeconomic Analysis. Atlantic Economic Journal, 38(3), 345-357. Zeddies, G. (2007). Determinants of international fragmentation of production in European Union. Empirica, (0).
Editorial Office
Center for Economic Integration, Sejong University, 209, Neungdong-Ro, Gwangjin-Gu,
Seoul, 05006, Korea
TEL : +82-2-3408-3338    FAX : +82-2-6935-2492   E-mail :,
Browse Articles |  Current Issue |  For Authors and Reviewers |  About
Copyright© by Center for Economic Integration.      Developed in M2PI