New Evidence for the PRC's Exports to the US

2.1 Background

Table 1 shows that the PRC's exports to the US exceed the PRC's imports from the US by a five-to-one ratio. Figure 3 [ PDF 47.8KB | 1 page ] shows that the PRC's exports to the US (but not US exports to the PRC) represent a major outlier for both countries. This section thus investigates the factors affecting the PRC's exports to the US

As Wakasugi (2009) argued, there is a fundamental difference between exports from Japan to the US and exports from the PRC to the US. Exports from Japan tend to be high-end, knowledge-intensive goods. Exports from the PRC tend to be more labor-intensive, given the abundance of unskilled labor in the PRC. METI (2009) similarly reported that Japan's exports to the US are dominated by high value-added consumer durables while the PRC's exports are dominated by basic goods such as clothing. The Republic of Korea (hereafter Korea) and Taipei,China's exports to the US are also dominated by high value-added goods such as passenger cars, household appliances, semiconductors, and computers.

Wakasugi (2009) and METI (2009) noted that since the PRC exports primarily basic goods to the US while Japan and the newly industrialized economies (NIEs) export primarily high-end luxury products, the income elasticity of demand for exports from the PRC to the US should be smaller than for exports from more advanced Asian economies to the US. Petri and Plummer (2009) similarly discussed how the product mix of PRC goods may lead to what they call the “Walmart” effect. By this they mean that “if Chinese exports are at low price points within various product categories, they will benefit from a down-market shift in the composition of consumption even if demand for the category as a whole declines” (Petri and Plummer 2009: 705). In other words, the product composition and low price of the PRC's exports may sustain demand even when income in the US falls.

Informal evidence from Figures 3 and 4 supports the hypothesis that the PRC's exports respond less to changes in US income than exports from developed Asia do. Both figures show detrended quarterly output in the US. Figure 3 also shows detrended, deseasonalized real exports from Japan; Korea; and Taipei,China to the US and Figure 4 [ PDF 46.9KB | 1 page ] also shows detrended, deseasonalized real exports from the PRC to the US. The large increase in detrended output up until the second quarter of 2000 and its subsequent large fall are associated with the dot-com bubble in the US and its bursting. Figure 3 shows that detrended, deseasonalized exports from developed Asia mirrored the pattern of US output at this time. On the other hand, Figure 4 shows a more tenuous relationship between US income over this period and PRC exports to the US.²

Several authors have presented formal evidence indicating that income elasticities are higher for exports from Japan; Korea; and Taipei,China to the US than for exports from the PRC to the US. Thorbecke (2008a), using a variety of cointegration estimators and quarterly data over the 1988–2005 period, reported that the income elasticity of demand for Japan's exports to the US was approximately 3. Kim (2009), using a Johansen cointegration model and quarterly data over the 1981–1998 period, reported that the income elasticity for Korea's exports to the US was 3.5. Chen (2001), using ordinary least squares (OLS) techniques and quarterly data over the 1981–1998 period, reported that income elasticity for Taipei,China's exports to the US was 2.6. In contrast, both Cheung, Chinn, and Fujii (2010) using DOLS methods and quarterly data over the 1993–2006 period and Thorbecke (2006) using DOLS and Johansen maximum likelihood estimation and quarterly data over the 1988–2005 period failed to find evidence that an increase in income in the US would increase the PRC's exports.

Cheung, Chinn, and Fujii (2010), Thorbecke (2006), and Yu (2009) all reported that a depreciation of the yuan is associated with an increase in the PRC's exports to the US. Cheung, Chinn, and Fujii reported exchange rate elasticities ranging from 0.80 to 2.03, Thorbecke reported elasticities ranging from 0.40 to 1.44, and Yu reported an exchange rate elasticity of 1.23.

This section reports updated findings for the PRC's exports to the US. Results from DOLS estimation indicate that an appreciation of the yuan relative to the dollar would reduce the PRC's exports to the US. On the other hand, the econometric results do not provide convincing evidence of a strong relationship between US income and the PRC's aggregate exports.

2.2 Data and Methodology

The imperfect substitutes model of Goldstein and Khan (1985) implies that export functions can be written as:

where ex_t represents the log of real exports, rer_t represents the log of the real exchange rate, and rgdp^* represents the log of foreign real income.

Monthly data on exports from the PRC to the US are available from the US Census Bureau. These data were summed to obtain quarterly values.

To deflate the PRC's exports to the US we used the US Bureau of Labor Statistics price deflator for manufactured imports from non-industrial countries. Chinn (2006) found that this series closely matches the Bureau of Labor Statistics price deflator for imports from the PRC, which became available in 2003.

Data for quarterly real GDP for the US were obtained from Organisation for Economic Co-operation and Development trade statistics. These data were seasonally adjusted.

The real exchange rate was calculated as the product of the yuan price of dollars and the ratio of the US to the PRC price levels. An increase in real exchange rate thus represents a depreciation of the yuan. In one specification, we followed Cheung, Chinn, and Fujii (2010) in using exchange rates before 1994 that are adjusted for the fact that some transactions took place at the official exchange rate and some took place at the “swap” rate.

Thorbecke (2006) argued that the PRC's exports to the US compete with exports from emerging Asia. Ahearne et al. (2003) presented evidence that economies in Asia follow a “flying geese” pattern, with the PRC and Association of Southeast Asian Nations-4 (ASEAN-4) moving into product categories relinquished by the Asian NIEs as they move up the value chain.³ Similarly, Gaulier, Lemoine, and Unal-Kesenci (2005) reported based on a detailed analysis of trade flow data that there is essentially a complimentary relationship between the PRC and the NIEs. On the other hand, they found that there is a competitive relationship between the PRC and ASEAN in the export of labor-intensive final goods to third countries. Thus, in empirical work, it is important to control for competition between exports from the PRC and exports from ASEAN.

A real exchange rate index (It) between the US and the ASEAN-4 countries (Indonesia, Malaysia, Philippines, and Thailand) can be calculated using the following formula:

where ri,t is the real exchange rate between ASEAN country i and the US in quarter t and wi,t is the weight assigned to ASEAN country i in quarter t. ri,t equals the currency price of dollars times the ratio of the US price level to the price level of country i. An increase in ri,t (and thus It) represents an appreciation of the dollar. wi,t is calculated as the ratio of exports from country i to the US divided by exports from all four ASEAN countries to the US. The sum of the wi,t thus equals 1. It is set equal to 100 in 1985Q1.

Following Cheung, Chinn, and Fujii (2010), we also included the capital stock to control for supply side factors. For the PRC, Bai, Hsieh, and Qian (2006) have constructed data on the capital stock. These data were converted to quarterly values using linear interpolation and updated over the last few years using data from the Economist Intelligence Unit database.

The model was estimated using DOLS. DOLS involves regressing the left-side variable on a constant, the right-side variables, and lags and leads of the right-side variables. The equation has the form:

where x_t represents exports from the Asian country to the US, rer_trepresents the bilateral real exchange rate index, rgdp_t equals real income in the US, K_t denotes the capital stock in the Asian country, eri represents the exchange rate index for other Asian countries, and Time is a time trend. Seasonal dummy variables are also included. x_t, rer_t, rgdp_t, K_t and eri_t are measured in natural logs.

Data on the import price indices are available beginning in 1990Q4 and data on the consumer price index are available until 2008Q4. We estimated equation (4) using a DOLS (2, 2) model.⁴ Because this involves using two leads and lags of the first differences of the right-side variables, the actual sample period for the estimation is 1990Q4–2008Q2.

2.3 Results

Tables 2 and 3 present the results. Table 2 [ PDF 46.3KB | 1 page ] contains the findings for the bilateral exchange rate adjusted for swap transactions and Table 3 [ PDF 46.3KB | 1 page ] contains the findings for the unadjusted bilateral exchange rate.

Across the 16 different specifications in Tables 2 and 3, the coefficient on the yuan exchange rate is positive in every case and statistically significant in 15 of the 16 cases. These results provide robust evidence that an appreciation of the yuan would reduce PRC exports to the US. The average value across all of the specifications is approximately unity. For income and the PRC capital stock, the coefficient values are sensitive to the econometric specification.

The evidence of a tenuous relationship between aggregate PRC exports and US income is supported by experience during 2008–2009. The yuan remained tightly pegged to the dollar, and a once-in-a-generation crisis barely reduced the PRC's exports to the US and its trade surplus. If policymakers want to reduce imbalances between the US and the PRC, an appreciation of the yuan is probably necessary.

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