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

1、Impact of RMB Appreciation on Trade and Labor Markets of China and the USAImpact of RMB Appreciation on Trade and Labor Markets of China and the USA: A Multi-country Comparative General Equilibrium ModelXin Li, Dianqing XuAbstractSince the recent economic crisis, the undervaluation of China，s exchan

2、ge rate has been a focus in the debate on the global policy mix. Using a non-competitive input-output table, we establish a comparative-static general equilibrium model to simulate the impact of real exchange rate changes on Sino-US trade and labor markets. The simulation shows that the impacts of a

3、 10-percent RMB revaluation on the trade surplus of China and the labor market of the USA are more modest than is generally perceived, and the negative impact on the output of the non-processing industry in China is more significant than that on the processing industry. The Sino-US trade imbalance w

4、ill continue to deteriorate, Chinas non-processing trade surplus will decline and the processing trade will increase, with the combined effect being small For the USA, labor-intensive goods imported from China will shift to different Asian countries instead of transferring back to the US market. The

5、 simulation results indicate that the impacts of an RMB revaluation on both Chinese and US labor markets would be limited.Key words: comparative general equilibrium model, exchange rate，international trade, labor market JELcodes:F16,F17,J21I, IntroductionSino-US economic trade has expanded substanti

6、ally over the past three decades. Bilateral trade between the two nations rose from US$5bn in 1980 to US$409bn in 2008 (Morrison, 2010). China has become the USAs second largest trading partner, its third largest export market and its biggest source of imports. Approximately 12 percent of total US f

7、oreign trade is now with China (Morrison, 2010).However, the current global economic crisis has strained Sino-US economic relations. Many analysts are concerned that the Chinese Government might, in an effort to help its sagging export industries, set new trade barriers, impose industrial subsidies

8、or depreciate its currency, which could harm US firms and workers (e.g. Scott, 2010). Many US policymakers have urged China to reduce its reliance on exports for its economic growth and to adopt incentive policies to promote domestic consumption. Central to this position is the belief that China sho

9、uld appreciate its currency and adopt a floating exchange rate system, which could boost its imports.There are two different points of view regarding whether the RMB should appreciate and the potential impact on the US economy. One view is that an exchange rate appreciation would not solve the enlar

10、ging US current account deficit. For example, Zhang et al. (2006) use a comparative general equilibrium (CGE) model to analyze the impacts of an appreciation of Chinas real exchange rate on the trade balance between China and the USA and various industries in both countries. Their results indicate t

11、hat Chinas output in both agriculture and manufacturing sectors will increase and Ghinas exchange rate appreciation might not solve the enlarging US current account deficit. Fair (2010) uses a multi-country model to estimate the macroeconomic effects of an RMB appreciation. The estimated effects on

12、US output and employment are modest. The positive effects on US output from decreased imports from China are offset by the negative effects on US output from increased domestic inflation and from a decrease in US exports to China because of Chinas likely economic contraction. Evenett and Francois (2

13、010) compare three general approaches to estimating the impact of an RMB appreciation relative to the US dollar on the US labor market. They indicate that a dearer RMB would boost the competitiveness ofUS exports to China but it would reduce overall US competitiveness. After taking imported intermed

14、iate inputs into account, an RMB appreciation relative to the US dollar is found to result in US job losses.Another opposing view is that RMB appreciation will have positive effects on the US economy, in particular on the US labor market. Bergsten (2010) believes that the RMB is undervalued by appro

15、ximately 25 percent on a trade-weighted average basis and by approximately 40 percent against the US dollar. He points out that this competitive undervaluation of the RMB is a blatant form of protectionism and that several neighboring Asian countries maintain currency undervaluation of roughly the s

16、ame magnitude in order to avoid losing their competitive position to China (Bergsten, 2010). Kmgrnan (2010) suggests that over the next couple of years, Chinese mercantilism might end up reducing US employment by approximately 1.4 million jobs. Gagnons (2010) research suggests that a 10-percent RMB

17、appreciation would boost US employment by at least 670 000 jobs. Scott (2010) indicates that the US trade deficit is the major reason for US high unemployment. He estimates that the US manufacturing sector lost 5.3 million jobs from January 2001 to September 2009. The USA has accumulated large struc

18、tural trade deficits over the past three decades, and in 2007, the non-oil share in the deficits was responsible for the loss or displacement of more than 5 million jobs.Previous research mostly focuses on the Sino-US bilateral trade and labor markets linkage, which might expand the positive or nega

19、tive effects of RMB appreciation on both economies. With the deepening of global economic integration, RMB appreciation could also impact Sino-US trade and the labor market via other countries indirect linkages. The present paper contributes to the published literature on RMB revaluation in three as

20、pects. First, we establish a non-competitive inputoutput table, which distinguishes processing trade and non-processing trade in the CGE model. For the low-cost intermediate inputs import, RMB appreciation might have little effect on processing manufacturing exports. Second, our research focuses on

21、the content of value-added instead of total value of exports. The effects of RMB appreciation depend on the extent of domestic and foreign content in the trade. If the domestic content is low (i.e. the value of exports reflects mostly the value of imported inputs), then the exchange rate appreciatio

22、n would have relatively little effect on exports. This is because the higher foreign currency price of the exports is partly offset by the lower domestic currency price of the imported inputs. To the extent that the domestic content varies by industries, an appreciation of the RMB is expected to hav

23、e different effects in different industries. Third，we establish a comprehensive multinational database, which covers 47 countries and regions, and 41 sectors.The rest of the paper is organized as follows. Section II outlines the basic situation of Sino-US trade. Section III describes the comparative

24、-static general equilibrium model and the data used in this paper. The main results and analysis are discussed in Section IV. Finally, Section V concludes the paper.II. Basic Situation of Sino-US TradeAccording to the statistics of the US International Trade Commission, US merchandise exports to Chi

25、na in 2008 valued US$71.5bn, up 9.5 percent over the previous year. In 2007， China overtook Japan to become the third largest US export market and US exports to China in 2008 accounted for 5.5 percent of total US exports. The top five US exports to China in 2008 were waste and scrap, semiconductors

26、and electronic components, oilseeds and grain, aircraft and parts, and resins, synthetic rubber and fibers.China was the largest source of US imports in 2008, with US$338bn in imports, accounting for 16.1 percent of total US imports. US imports from China rose by 5.1 percent in 2008 over the previou

27、s year (Morrison, 2010). The importance of China as a source of US imports has risen dramatically. China moved from being the eighth largest importer in 1990, to the fourth in 2000，the second in 20042006, and, finally, to the first largest importer of the USA in 2007-2008. The top three commodities

28、that the USA imported from China in 2008 were communications equipment, apparel, audio and video equipment (Morrison，2010). Sino-US economic ties have expanded substantially over the past two decades (see Figure 1).Figure 1 shows that during 1990-2008 Sino-US trade increased substantially. Over the

29、past 20 years, US imports from China have increased faster than US exports to China. The Sino-US trade deficit has surged since 2000, and is significantly larger than that with any other US trading partner and several trading groups. For exaiiqle, in 2009，it was nearly equal to the combined US defic

30、it with the countries that make up the Organization of the Petroleum Figure 1. US Exports to and Imports from China, 1990-2008Source: OECD (2009). 2011 The Authors-US exports to China -US imports from China US balanceChina & World Economy 2011 Institute of World Economics and Politics, Chinese Acade

31、my of Social SciencesExport Countries (OPEC) and the 27 countries that make up the European Union (EU27), and it was more than three times larger than the trade deficit with Japan (Morrison, 2010).McKinnon and Schnabl (2009) believe that the Sino-US trade imbalance can only be corrected in the long

32、term if Chinas net savings fall and the inverse occurs in the USA. However, in the short run, the imbalance is mainly embodied in the trade structure, especially in bilateral trade of high-technology products.1. Structure of Bilateral Sino-US TradeThe fundamental factors of the two economies that de

33、termined the commodities of trade pattern during the 1980s to the 1990s can be explained by the concept of comparative advantage. China，with an abundant low-cost labor force, exports labor-intensive manufactured goods and low value-added goods，such as textiles, clothing and footwear to the USA, whereas the USA exports high-