Exchange Rate Induced Export Quality Upgrading: A Firm-Level Perspective

Abstract

This paper explores the impact of exchange rate fluctuations on exported product quality. Existing studies of quality upgrading stress the link between home country depreciation and increased access to export markets. Our focus in this study is on the complimentary effect of an import currency appreciation (i.e., the domestic currency appreciates relative to the sourcing country's currency). Our main finding is that firms upgrade their export quality in response to an import currency appreciation. We first develop a partial equilibrium model to reveal the mechanism: an import currency appreciation that makes imported intermediates cheaper allows firms to switch to higher quality intermediates, which in turn, increase export quality. Using Chinese Customs data during 2000-2006, we find that an import appreciation increases both import, and export quality. Furthermore, export quality increases more for less productive firms, and for firms exporting to developed countries.

Renminbi Appreciation and China's Industrial Upgrading

“…This finding is consistent with the available empirical evidence which generally finds that importing inputs benefits the sectors producing high-quality products (Amiti and Khandelwal, 2013), creates new products (Colantone and Crino, 2014), and contributes to quality and industrial upgrading (Crino, 2012;Bas and Strauss-Kahn, 2015;Feng et al, 2016;Zhang and Ouyang, 2018;Hu et al, 2021). In contrast, being able to export the output does not influence the firm's decision to enter the skill-based sector in a nontrivial way, perhaps because nominal appreciation reduces export profi tability denominated in domestic currency, nullifying the incentive for the skill-based sector.…”

Exchange rate fluctuations and quality composition of exports: Evidence from Swiss product‐level data

“…In addition, Verhoogen's sample period coincides with the aftermath of the Tequila crisis in which Mexico was affected by massive capital outflows and a Peso depreciation, while our sample contains appreciation episodes that were mainly driven by (safe haven) capital inflows. Our study is also related to Hu, Parsley, and Tan () that show that Chinese firms increase the quality of exported products through upgrading imported inputs after an appreciation of the Chinese currency vis‐à‐vis input sourcing countries. Our study differs in the sense that we concentrate on exchange rate‐driven reallocation effects within product groups that result in changes of the average export quality.…”

Trade liberalization, export quality, and three dimensions of wage inequality*

“…3 Brazil's emphasis on autonomous trade liberalization since 1992, even before the conclusion of the Uruguay Round, allowed it to make deep cuts in tariff rates, to eliminate most of its nontariff measures, and to make specific commitments in the area of financial services. 4 Note that if higher qualities had been contingent only on intensive use of imported inputs as argued in a parallel literature (Bas & Strauss-Khan, 2013;Fan & Li, 2013;Hu, Parsely, & Tan, 2017;Kugler & Verhoogen, 2012), then reductions in tariffs on such inputs would have unambiguously improved the quality of export goods across the board, with only the magnitude of such improvements differing due to differences in import intensity. But what we observe in Figure 1 is contrary to this.…”

“… 4 4 Note that if higher qualities had been contingent only on intensive use of imported inputs as argued in a parallel literature (Bas & Strauss‐Khan, 2013; Fan & Li, 2013; Hu, Parsely, & Tan, 2017; Kugler & Verhoogen, 2012), then reductions in tariffs on such inputs would have unambiguously improved the quality of export goods across the board, with only the magnitude of such improvements differing due to differences in import intensity. But what we observe in Figure 1 is contrary to this. …”