Impact of RMB Appreciation on Trade and Labor Markets of China and the USA.docx

Impact of RMB Appreciation on Trade and Labor Markets of China and the USA.docx

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ImpactofRMBAppreciationonTradeandLaborMarketsofChinaandtheUSA

ImpactofRMBAppreciationonTradeandLaborMarketsofChinaandtheUSA:

AMulti-countryComparativeGeneralEquilibriumModel

XinLi,DianqingXu

Abstract

Sincetherecenteconomiccrisis,theundervaluationofChina，sexchangeratehasbeenafocusinthedebateontheglobalpolicymix.Usinganon-competitiveinput-outputtable,weestablishacomparative-staticgeneralequilibriummodeltosimulatetheimpactofrealexchangeratechangesonSino-UStradeandlabormarkets.Thesimulationshowsthattheimpactsofa10-percentRMBrevaluationonthetradesurplusofChinaandthelabormarketoftheUSAaremoremodestthanisgenerallyperceived,andthenegativeimpactontheoutputofthenon-processingindustryinChinaismoresignificantthanthatontheprocessingindustry.TheSino-UStradeimbalancewillcontinuetodeteriorate,China'snon-processingtradesurpluswilldeclineandtheprocessingtradewillincrease,withthecombinedeffectbeingsmallFortheUSA,labor-intensivegoodsimportedfromChinawillshifttodifferentAsiancountriesinsteadoftransferringbacktotheUSmarket.ThesimulationresultsindicatethattheimpactsofanRMBrevaluationonbothChineseandUSlabormarketswouldbelimited.

Keywords:

comparativegeneralequilibriummodel,exchangerate，internationaltrade,labormarketJELcodes:

F16,F17,J21

I,Introduction

Sino-USeconomictradehasexpandedsubstantiallyoverthepastthreedecades.BilateraltradebetweenthetwonationsrosefromUS$5bnin1980toUS$409bnin2008（Morrison,2010）.ChinahasbecometheUSA'ssecondlargesttradingpartner,itsthirdlargestexportmarketanditsbiggestsourceofimports.Approximately12percentoftotalUSforeigntradeisnowwithChina（Morrison,2010）.

However,thecurrentglobaleconomiccrisishasstrainedSino-USeconomicrelations.ManyanalystsareconcernedthattheChineseGovernmentmight,inanefforttohelpitssaggingexportindustries,setnewtradebarriers,imposeindustrialsubsidiesordepreciateitscurrency,whichcouldharmUSfirmsandworkers（e.g.Scott,2010）.ManyUSpolicymakershaveurgedChinatoreduceitsrelianceonexportsforitseconomicgrowthandtoadoptincentivepoliciestopromotedomesticconsumption.CentraltothispositionisthebeliefthatChinashouldappreciateitscurrencyandadoptafloatingexchangeratesystem,whichcouldboostitsimports.

TherearetwodifferentpointsofviewregardingwhethertheRMBshouldappreciateandthepotentialimpactontheUSeconomy.OneviewisthatanexchangerateappreciationwouldnotsolvetheenlargingUScurrentaccountdeficit.Forexample,Zhangetal.（2006）useacomparativegeneralequilibrium（CGE）modeltoanalyzetheimpactsofanappreciationofChina’srealexchangerateonthetradebalancebetweenChinaandtheUSAandvariousindustriesinbothcountries.TheirresultsindicatethatChina’soutputinbothagricultureandmanufacturingsectorswillincreaseandGhina’sexchangerateappreciationmightnotsolvetheenlargingUScurrentaccountdeficit.Fair（2010）usesamulti-countrymodeltoestimatethemacroeconomiceffectsofanRMBappreciation.TheestimatedeffectsonUSoutputandemploymentaremodest.ThepositiveeffectsonUSoutputfromdecreasedimportsfromChinaareoffsetbythenegativeeffectsonUSoutputfromincreaseddomesticinflationandfromadecreaseinUSexportstoChinabecauseofChina’slikelyeconomiccontraction.EvenettandFrancois（2010）comparethreegeneralapproachestoestimatingtheimpactofanRMBappreciationrelativetotheUSdollarontheUSlabormarket.TheyindicatethatadearerRMBwouldboostthecompetitivenessofUSexportstoChinabutitwouldreduceoverallUScompetitiveness.Aftertakingimportedintermediateinputsintoaccount,anRMBappreciationrelativetotheUSdollarisfoundtoresultinUSjoblosses.

AnotheropposingviewisthatRMBappreciationwillhavepositiveeffectsontheUSeconomy,inparticularontheUSlabormarket.Bergsten（2010）believesthattheRMBisundervaluedbyapproximately25percentonatrade-weightedaveragebasisandbyapproximately40percentagainsttheUSdollar.HepointsoutthatthiscompetitiveundervaluationoftheRMBisablatantformofprotectionismandthatseveralneighboringAsiancountriesmaintaincurrencyundervaluationofroughlythesamemagnitudeinordertoavoidlosingtheircompetitivepositiontoChina（Bergsten,2010）.Kmgrnan（2010）suggeststhatoverthenextcoupleofyears,ChinesemercantilismmightendupreducingUSemploymentbyapproximately1.4millionjobs.Gagnon’s（2010）researchsuggeststhata10-percentRMBappreciationwouldboostUSemploymentbyatleast670000jobs.Scott（2010）indicatesthattheUStradedeficitisthemajorreasonforUShighunemployment.HeestimatesthattheUSmanufacturingsectorlost5.3millionjobsfromJanuary2001toSeptember2009.TheUSAhasaccumulatedlargestructuraltradedeficitsoverthepastthreedecades,andin2007,thenon-oilshareinthedeficitswasresponsibleforthelossordisplacementofmorethan5millionjobs.

PreviousresearchmostlyfocusesontheSino-USbilateraltradeandlabormarket’slinkage,whichmightexpandthepositiveornegativeeffectsofRMBappreciationonbotheconomies.Withthedeepeningofglobaleconomicintegration,RMBappreciationcouldalsoimpactSino-UStradeandthelabormarketviaothercountries’indirectlinkages.ThepresentpapercontributestothepublishedliteratureonRMBrevaluationinthreeaspects.First,weestablishanon-competitiveinput—outputtable,whichdistinguishesprocessingtradeandnon-processingtradeintheCGEmodel.Forthelow-costintermediateinputsimport,RMBappreciationmighthavelittleeffectonprocessingmanufacturingexports.Second,ourresearchfocusesonthecontentofvalue-addedinsteadoftotalvalueofexports.TheeffectsofRMBappreciationdependontheextentofdomesticandforeigncontentinthetrade.Ifthedomesticcontentislow（i.e.thevalueofexportsreflectsmostlythevalueofimportedinputs）,thentheexchangerateappreciationwouldhaverelativelylittleeffectonexports.Thisisbecausethehigherforeigncurrencypriceoftheexportsispartlyoffsetbythelowerdomesticcurrencypriceoftheimportedinputs.Totheextentthatthedomesticcontentvariesbyindustries,anappreciationoftheRMBisexpectedtohavedifferenteffectsindifferentindustries.Third，weestablishacomprehensivemultinationaldatabase,whichcovers47countriesandregions,and41sectors.

Therestofthepaperisorganizedasfollows.SectionIIoutlinesthebasicsituationofSino-UStrade.SectionIIIdescribesthecomparative-staticgeneralequilibriummodelandthedatausedinthispaper.ThemainresultsandanalysisarediscussedinSectionIV.Finally,SectionVconcludesthepaper.

II.BasicSituationofSino-USTrade

AccordingtothestatisticsoftheUSInternationalTradeCommission,USmerchandiseexportstoChinain2008valuedUS$71.5bn,up9.5percentoverthepreviousyear.In2007，ChinaovertookJapantobecomethethirdlargestUSexportmarketandUSexportstoChinain2008accountedfor5.5percentoftotalUSexports.ThetopfiveUSexportstoChinain2008werewasteandscrap,semiconductorsandelectroniccomponents,oilseedsandgrain,aircraftandparts,andresins,syntheticrubberandfibers.

ChinawasthelargestsourceofUSimportsin2008,withUS$338bninimports,accountingfor16.1percentoftotalUSimports.USimportsfromChinaroseby5.1percentin2008overthepreviousyear（Morrison,2010）.TheimportanceofChinaasasourceofUSimportshasrisendramatically.Chinamovedfrombeingtheeighthlargestimporterin1990,tothefourthin2000，thesecondin2004—2006,and,finally,tothefirstlargestimporteroftheUSAin2007-2008.ThetopthreecommoditiesthattheUSAimportedfromChinain2008werecommunicationsequipment,apparel,audioandvideoequipment（Morrison，2010）.Sino-USeconomictieshaveexpandedsubstantiallyoverthepasttwodecades（seeFigure1）.

Figure1showsthatduring1990-2008Sino-UStradeincreasedsubstantially.Overthepast20years,USimportsfromChinahaveincreasedfasterthanUSexportstoChina.TheSino-UStradedeficithassurgedsince2000,andissignificantlylargerthanthatwithanyotherUStradingpartnerandseveraltradinggroups.Forexaiiq>le,in2009，itwasnearlyequaltothecombinedUSdeficitwiththecountriesthatmakeuptheOrganizationofthePetroleum

Figure1.USExportstoandImportsfromChina,1990-2008

Source:

OECD（2009）.©2011TheAuthors

-USexportstoChina-USimportsfromChina■USbalance

China&WorldEconomy©2011InstituteofWorldEconomicsandPolitics,ChineseAcademyofSocialSciences

‘

ExportCountries（OPEC）andthe27countriesthatmakeuptheEuropeanUnion（EU27）,anditwasmorethanthreetimeslargerthanthetradedeficitwithJapan（Morrison,2010）.

McKinnonandSchnabl（2009）believethattheSino-UStradeimbalancecanonlybecorrectedinthelongtermifChina’snetsavingsfallandtheinverseoccursintheUSA.However,intheshortrun,theimbalanceismainlyembodiedinthetradestructure,especiallyinbilateraltradeofhigh-technologyproducts.

1.StructureofBilateralSino-USTrade

Thefundamentalfactorsofthetwoeconomiesthatdeterminedthecommoditiesoftradepatternduringthe1980stothe1990scanbeexplainedbytheconceptofcomparativeadvantage.China，withanabundantlow-costlaborforce,exportslabor-intensivemanufacturedgoodsandlowvalue-addedgoods，suchastextiles,clothingandfootweartotheUSA,whereastheUSAexportshigh-