us manufacturing

8/12/2019 Us Manufacturing

1/44

The Effect of Changes in Chinas RMB

on the Performance of US Manufacturing

David Kley am! David "le#ander De $eon Sala%ar De!artment of Economics& 'nstitute of the "mericas

Tam ang University Tam ang University

Decem(er )*& )+,,

David Kley am! is "ssociate Professor of Economics at Tam ang University- .ereceived his PhD in Economics from Te#as "/M University in ,*01- .e has

!u(lished !a!ers in the Tam ang 2ournal of 'nternational "ffairs& "rea Studies& andthe Economic 2ournal of the Ban of Tai3an-

David "le#ander De $eon Sala%ar is a PhD candidate in the 'nstitute of the "mericasat Tam ang University-

Key3ords4 Chinese 5uan& RMB& Manufacturing& Deindustriali%ation& Productivity


2/44

"(stract

Considera(le controversy surrounds the issue of 3hether a revaluation of the Chinese

currency 3ould hel! the !erformance of the US manufacturing sector- 't is felt (y some

that China6s currency !olicies have (een in !art res!onsi(le for eliminating manufacturing

7o(s in the US& 3hile !lacing do3n3ard !ressure on manufacturing 3ages and out!ut

gro3th- This !a!er assesses these claims (y loo ing at macroeconomic data on US

manufacturing em!loyment& out!ut& and real com!ensation- 't is found that the Chinese

yuan does have a statistically significant effect on em!loyment and out!ut gro3th& (ut

these effects are small in magnitude and thus inconse8uential- 't is also found that

increases in the value of the Chinese yuan lo3er real hourly com!ensation in US

manufacturing (y reducing the !urchasing !o3er of the vast ma7ority of 3or ers 3ho

retain their 7o(s- The general conclusion of the !a!er is that US officials 3ould (e (etter

advised to see mar et o!ening initiatives& since e#!orts are found to have a consistently

stronger effect on manufacturing !erformance than general movements in the RMB-


3/44

'- 'ntroduction

The secular decline in em!loyment in US manufacturing& cou!led 3ith the stu!endous

rise in US trade deficits 3ith China& has made China a !erennial target for certain US

officials6 condemnations& 3ith accusations that China is su!!orting its gro3th and

e#!ansion at the e#!ense of the "merican manufacturing 3or er- The im!ortation of

relatively chea! Chinese manufactured goods& (oth !roducer and consumer items& are held

(y these !eo!le to (e res!onsi(le for eliminating high !aying& high valued9added

manufacturing 7o(s& along 3ith the acceleration of a general deindustriali%ation of the US

and a rising fear among some of long term "merican economic stagnation and decline-

The case of China is !er!le#ing& multifaceted& and 8uite unli e that of 2a!an and Tai3an

during the ,*0+s- 'n the !ast& 2a!an6s sur!lus 3ith the US 3as concentrated in a fe3

sectors 3ith 3ell over :+; of its sur!lus due to automo(iles , -

Tai3an6s sur!lus 3ith the US 3as li e3ise mainly due to electronics and te#tiles& 3hich

the US dealt 3ith through Tai3an6s im!osition of voluntary e#!ort restraints& as 3ell as its

self9regulation (y industrial and manufacturing associations& and trade9(ased memoranda

of understanding ) - By contrast& China6s e#!orts to the US are no3 s!read among a myriad

of industries and firms& and these firms do not receive direct aid or overt !rotection from

, See Michael S- ?lynn& Sean P- Mc"linden& and David 2- "ndrea& The U.S-Japan Bilateral 1993 Automotive Trade Deficit &


4/44

the government- They are small scale& highly agile and innovative& and en7oy su(stantial

cost advantages over their foreign rivals- The anonymous and highly dis!ersed nature of

such com!etition has forced the US to a(andon any efforts to identify s!ecific Chinese

com!anies or grou!s of firms as the cause of its deteriorating manufacturing em!loyment-

That 3ould clearly (e infeasi(le- 'nstead& the US government has focused attention on the

Chinese government6s (road macroeconomic !olicies and in !articular the !olicy of

maintaining 3hat some in the US (elieve is an undervalued renmin(i -

There have (een 8uite loud and vociferous calls for China to allo3 its RMB USD

e#change rate to freely float to a level that 3ould (etter reflect mar et fundamentals-

Those ma ing such calls !resuma(ly feel that it 3ould ameliorate the trade im(alance and

3ould im!rove US manufacturing !erformance& des!ite the fact that it 3ould also hurt the

"merican consumer and reduce ca!ital inflo3-

The Chinese government and its su!!orters in academia have understanda(ly not (een

!assive in their reaction to "merican calls for a freeing of the RMB mar et- Control of the

RMB is merely thought to (e !art of the larger issue of sovereignty F or !erha!s !art of

general monetary and fiscal !olicyG something fe3 3ould claim should (e designed 3ith

foreign 3elfare in mind- Beyond this& there have (een serious claims that the RMB is not

undervalued or that it is (eing held sta(le relative to a (as et of currencies- 'n still other

settings it has (een argued that a rising RMB 3ould not alleviate the im(alances in trade

due to lo3 elasticities of demand for such goods& or due to com!etitive !ressures from

other countries& or due to a lac of national saving on the !art of "mericans-

This !a!er is concerned 3ith determining 3hether calls for revaluation of the RMB are

em!irically 7ustified- That is& (ased on !ast aggregate& time series data& to 3hat e#tent


5/44

3ould a stronger RMB& vi -a-vi the USD& result in significant and meaningful increases

in US manufacturing em!loyment& out!ut& and real 3ages- There is a strong !resum!tion

if mar ets 3or then movements in relative international !rices& as influenced (y

e#change rates& can e8uili(rate the large im(alances seen in (ilateral trade (et3een the US

and China- "ccording to this vie3& the value of the RMB should (e im!ortant in

rectifying such im(alances in trade- 'f the US has industries that directly com!ete 3ith

Chinese firms& a rising RMB 3ill e#!and out!ut& em!loyment and real 3ages- ?or

industries that do not com!ete directly 3ith the Chinese& a rising RMB can !rovide

Chinese 3ith !urchasing !o3er that e#!ands US e#!orts of goods to China and again

3or s to eliminate the trade deficit-

o e#!ressly normative argument is made here for freeing u! the RMB- 'nstead& a series

of counterfactual& statistical arguments are !resented as ing 3hether a stronger RMB

3ould indeed lead to higher out!ut& em!loyment& and 3ages in US manufacturing-

The structure of the !a!er is as follo3s- Section '' surveys recent research on 3hether the

Chinese RMB is currently undervalued relative to the USD- 'n addition& consideration is

ta en of studies that have tried to assess the im!act of China6s im!orts on US

manufacturing- Section ''' !resents a sim!le theoretical frame3or to guide the

s!ecification of em!irical models to (e tested and clarifies three im!ortant factors thatim!act on US manufacturing& including the im!ortation of manufactured goods- Section

'H introduces several em!irical models that are then used to gauge the im!ortance of the

RMB on US manufacturing !erformance- Section H concludes the !a!er-

''- " Short Revie3 of the $iterature


6/44

The notion of a secular trade9induced decline of US manufacturing has (een around for

many decades- 't 3as a !rominent during the ,* +s and ,*0+s 3hen 2a!an 3as singled

out as the ma7or factor in the destruction of US manufacturing 7o(s in steel and

automo(iles- During the ,*0+s it 3as asserted that the 2a!anese 3ere com!eting unfairly

in steel& automo(iles& electronics& and house a!!liances and 3ere systematically ac8uiring

US no39ho3 that 3ould eventually lead to a !ermanently 3ea and enfee(led US

manufacturing sector- Even !rominent economists from M'T too a stand in defense of a

core of US manufacturing 3hich must (e e!t healthy to serve as a (asis for the real

economy- 1 orry a(out this deindustriali%ation (y design 3as !ut on hold (eginning in

,**, 3hen it (ecame clear that the US 3as still the !reeminent national economy in the

3orld and 2a!an (egan its decent into a lost decade-

Deindustriali%ation nevertheless continued to (e a to!ic of concern to many economists

3ho attem!ted to categori%e the various causes for the decline in the !ercentage

em!loyment in manufacturing- Kollmeyer e#!lains deindustriali%ation as a natural

!rocess of rising affluence- Thus& a rise in 3ealth leads households to turn to services

rather than dura(les& causing that sector of the economy to increase and thus lo3er

em!loyment in the manufacturing sector- Ro3thorn and Coutts !rovide a clear set

of reasons for the deindustriali%ation seen in develo!ing countries including domestic

outsourcing of servicesG changes in consum!tion !atterns G gro3th of !roductivity in

manufacturingG trade dis!lacementsG and changes in the !ercentage of investment in

IDP - Their argument on !roductivity gro3th is illuminating since it states that

manufacturing !roductivity gro3th is higher than that of services and therefore services

re8uire more la(or over time to maintain out!ut levels- This reduces la(or used in

1 See Michael $- Dertou%os& Richard K- $ester& and Ro(ert Solo3& )ade in America* +e,ainin, the Productive (d,e &


7/44

manufacturing as a !ercentage of the 3hole- Ro3thorn has em!hasi%ed the role of

!roductivity as the main driver of deindustriali%ation- .e finds less evidence that

manufacturing !erformance declines in res!onse to trade 3ith develo!ing countries-

Montesor and Mar%etti !rovide evidence that deindustriali%ation is not sim!ly an

Ja!!eared !henomenonJ 3here an outsourcing of services to firms outside of

manufacturing reduces manufacturing em!loyment and

increases service em!loyment- Rich agrees that trade is not clearly causing a

destruction of 7o(s in manufacturing& (ut outsourcing may (e !artly res!onsi(le- ic ell&

Redding& and S3affield do not a!!ear to give much em!hasis to trade in

e#!laining deindustriali%ation of develo!ed countries- ?or them deindustriali%ation is not

3ell understood 3ith com!licated dynamics& caused in !art (y em!loyment !rotection

!olicies- @verall& these authors stress that much of deindustriali%ation is due to

!roductivity gro3th& changes in relative !rices& and changes in education-

Des!ite the fact that many of these authors do not find trade to (e the main cause of

deindustriali%ation& controversy again arose at the start of the ), st century 3ith the

stu!endous rise in China6s economy and the concomitant rise in US (ilateral trade deficits

3ith the PRC- "s these trade deficits 3idened and US manufacturing em!loyment

continued to fall in large num(ers& es!ecially after )++,& there 3ere rene3ed calls for

action against 3hat 3as seen as !redatory Chinese !ractices against US manufacturing

(usiness F in !articular& currency mani!ulation- Chan has re!orted that the 'M?

has (een fee(le in res!onding to currency issues that are needed to correct im(alances

(et3een sur!lus countries and deficit countries -

China has li e3ise attem!ted to defuse tensions over the RMB (y using a slo3

a!!reciation- US Treasury Ieithner is characteri%ed (y Chan as (elieving that China is


8/44

!ur!osely (loc ing an a!!reciation of the RMB- This vie3 has (ecome common!lace

among many o(servers in the US that the Chinese are strategically (oosting their mar et

share in the US (y ee!ing the value of the USD high relative to the RMB-

'n fact& China has (ecome a manufacturing hu( for many "sian nations 3ho feed im!orts

into China& !rocess them using chea! la(or& and then e#!ort these on to develo!ed

countries such as the US and Euro!e- @ver the !ast decade& large collective current

account sur!luses that countries such as South Korea& Tai3an& and 2a!an had e#!erienced

3ith the US 3ere (rought together very !rominently and channeled through China

ma ing China an easy target for "merican animosity and controversy- The US

government has (ecome more and more aggressive a(out dealing 3ith 3hat it !erceives

as a Chinese mani!ulation of its currency- ?ran el and ei have studied the

(ehavior of the US Treasury in naming currency mani!ulators and have found that the

Treasury is motivated in !art out of large trade deficits 3ith those countries named-

evertheless& .ale and .ale ta e the !osition that revaluation is the 3rong

a!!roach to ta e 3ith the Chinese arguing that ) ; of Chinese e#!orts are ultimately

generated (y US cor!orations G that China6s sur!lus is

(alanced (y a regional deficitsG that currency a!!reciation 3ould ma e im!orts chea!er

and may lead to greater e#!ortsG and that internal reforms are more im!ortant than

currency realignments- .o3ever& Morrison !rovides a com!lete discussion of US9

China trade dis!utes and lists Congressional legislation !ro!osed to force China to revalue

its currency F including !arts of such (ills as S- ,A0=& .R )1 0& S- ,+) & S- ,)A:& and S-

1,1:- "s an aside& 2ohnson !rovides a rather !eculiar testimony (efore a

Congressional committee dealing 3ith the im!act of Chinese trade on US manufacturing

since a(solutely no mention is made of China or trade at all-


9/44

The controversy& in (oth !rivate and governmental circles that has arisen& has led to an

out!ouring of research on the RMB6s effect on the US economy and the level of the RMB

that 3ould most li ely eliminate the (ilateral trade deficit 3ith the US-

Baugh and 5ud en assert that trade is costing "merican 7o(s 3ithout !roviding

much evidence- They then use this as a (asis to advocate !ro9union changes to US

economic !olicy and an e#tension of la(or rights to countries such as China- They are

!articularly 3orried that even large high9tech manufacturing 3or s& such as the

!roduction of the Boeing 0 3ill eventually (e largely farmed out to Chinese 3or ers&

something that seems highly unli ely- Bernard highlights the negative effects that

trade has had on Canadian manufacturing 7o(s- U! to one in seven 7o(s 3ere lost during

the !eriod )++: F )++0- Te#tiles and clothing have (een !articularly hard hit- There has

also (een a large and im!ortant migration of manufacturing firms from Canada to China-

The Canadian e#!erience has a direct (earing on the fate of US manufacturing firms due

to their !ro#imity and similarity in 3age levels& etc- Ed3ards and $a3rence found

that Chinese manufactured have resulted in lo3er manufacturing !rices& (ut this has not

caused greater 3age ine8uality as 3ould (e e#!ected if factor !rice e8uali%ation 3as at

3or - They claim this indicates that Chinese and US manufactured goods may (e 8uite

different and therefore do not su(stitute 3ell 3ith each other- ?air em!loyed a

multi9country econometric model to determine the effect of a rise in the value of the RMB

on (oth the US and Chinese economy- .e finds that US out!ut and em!loyment rise& (ut

the effects are modest in si%e- Iris3old ma es a strong case for free and o!en

trade& asserting that in ,**: only ,); of "merican manufacturing 3or ers 3ere in

industries that 3ere e#!osed to im!orts totaling 1+; or more of total out!ut in that


10/44

industry- The vast ma7ority of 3or ers in the US are em!loyed in sectors that are only

marginally involved in trade- These 3or ers (enefit most from lo3 !riced !roducts from

China and 3ould (e hurt (y an increase in the RMB- 5u & on the other hand&

em!loyed a large scale gravity model to sho3 that a rise in the RMB 3ould have a

su(stantial effect on Chinese e#!ort to the US- The study ho3ever has several une#!ected

results& including the fact that 3hen fi#ed effects are introduced& US IDP a!!ears to have

no statistically significant effect on US im!orts from China- 'n addition& there does not

a!!ear to (e any discussion of ho3 a rising RMB 3ould im!act on US e#!orts to China&

3hich might (e thought to (e even more im!ortant in hel!ing to (alance trade and raise

US manufacturing em!loyment-

Des!ite a divergence of o!inion regarding ho3 much influence the RMB e#erts on US

manufacturing& there has (een considera(le interest in trying to estimate the level of RMB

that 3ould generate a current account (alance for China& and in !articular the level that

3ould eliminate the large (ilateral trade sur!lus 3ith the US- Since trade (et3een China

and the US is dominated (y manufactures& it is thought that re(alancing 3ould have a

!ositive effect on US manufacturing !erformance-

Bergsten and Bergsten sees the RMB as )+; undervalued and has (een

vociferously advocating the a!!lication of !ressure on the Chinese government to raisethe RMB 09,+; !er year- Cheung& Chinn and ?u7ii have !rovided a large survey

of estimates ranging from a high of A+9= ; to a lo3 of +9,);- Cline feels that a

regional a!!reciation of currencies 3ould (e more effective at reducing China6s current

account sur!lus 3ith the US 3ith a ,+; revaluation in the RMB resulting in a lo3 of L))

(illion reduction in the sur!lus to a high of L =1 (illion- Thor(ec e also (elieves


11/44

that the structure of China6s trade& 3ith ) 16s of im!orts coming from East "sia to (e

!rocessed for e#!ort& re8uires a (road& regional a!!reciation in order to see a (alancing of

its current account- Ioldstein and $ardy estimate that the RMB 3as )+9:+;

undervalued during )++A and made a !rominent call for an immediate revaluation of ,+;

in the value of the RMB relative to the USD- By contrast& in and .e more

recently use time series data and find that China6s real e#change rate


12/44

suffer a great many faults- halley and ang use a com!uta(le general

e8uili(rium model to analy%e the effect of a reevaluation of the RMB on trade flo3s and

trade sur!lus- They find a strong effect of revaluation on (oth& (ut !articularly on the

sur!lus- .o3ever& their results de!end crucially on the degree of su(stituta(ility of

domestic !roduction for foreign !roduction in consumer demand- This is !recisely the

!ro(lemG vi%- it is difficult to assess ho3 much US consumers 3ould react to higher !rices

on Chinese goods and 3hether US !roduction is a close su(stitute- Oing has found

very little effect of an RMB revaluation on the (ilateral trade (alance- Econometrically& it

is difficult to determine the effect of an a!!reciation on trade since !ast a!!reciation has

(een slo3& !redicta(le& and minute-

'''- Some Theoretical Considerations

There e#ist a set of traditional 3ays to a!!roach the issue of measuring the effect of a

currency a!!reciation on a foreign industry - @ne

a!!roach 3ould model the microeconomic o(7ectives and constraints and then e#!licitly

derive the e#!ected effects of an a!!reciation as a (y9!roduct of the o!timi%ation !rocess-

.o3ever& this a!!roach assumes that there is high fre8uency data at a detailed

microeconomic level F something that is unli ely to e#ist for the case of China- The

analysis is also invaria(ly !artial e8uili(rium in !ractice since the microeconomic as!ectsof the model cannot (e easily e#tended to other levels of economy and other countries&

many of 3hich are also involved in trade 3ith the industry (oth domestically and

internationally- This !laces limits on the idea that a feasi(le model can (e (uilt u! from

rational ma#imi%ing (ehavior at the individual firm level- "n additional !ro(lem is that

the re!resentative firm is so generic that it often fails to ca!ture any of the im!ortant


13/44

features of real life firms& such as aggregation constraints& ris and uncertainty& !roduct

8ualities& name (rands& regulation& mar eting costs& trans!ortation and insurance& strategic

!lanning& and many other attri(utes that remain comforta(ly under the surface at a

macroeconomic level

"n alternative a!!roach 3ould a(andon the fiction of a sta(le& generic re!resentative firm&

3hich is involved in ma#imi%ing !rofits& in favor of an aggregate model that is (uilt from

no3n macroeconomic e8uili(rium relations or identities- There are many e#am!les of

this in macroeconomics& such as the familiar e8uation of e#change from monetary theoryG

the Keynesian cross from macroeconomicsG (alance of !ayments models from

international financeG and Iordon6s stoc 9(ond ar(itrage e8uation from stoc valuation

theory- 'n each case& a 3ell no3n& generally acce!ted identity& definition& or ar(itrage

relation is chosen- Then& actual and de ired 8uantities are distinguished F 3ith actual

8uantities coming from the identity or definition and de ired 8uantities coming from

fle#i(le theoretical considerations- 'n some cases& an e#!licit o!timi%ation model can (e

used to derive the desired 8uantities and at other times& 3hen the sheer num(er of

varia(les in !lay (ecomes im!ossi(le to handle 3ithin a single o!timi%ation model& these

varia(les can (e entered in a general 3ay into the model- "ll that is needed is an intuitive

!ath (et3een the data and the desired varia(le in the identity-

e ado!t the second ty!e of methodology s!o en of a(ove and (egin (y 3riting the

definition of average la(or !roductivity as

- #

(.


14/44

3here y average la(or !roductivity& 5 real manufacturing out!ut& E total la(or

em!loyed in !roducing 5 and measured in terms of !ersons& and . average hours !er

em!loyee over the o(servation !eriod- Ta ing natural logs and solving this for E in terms

of the other varia(les results in

ln/ ( 0 ln/ 0 ln/ # 0 ln/ 0

e ne#t (reathe life into this accounting relation (y assuming that the desired& as o!!osed

to actual& hours . can (e 3ritten as

2 A # ( e eo =

3here O6 is a linear com(ination of other varia(les that affect .- The last varia(le

is a random varia(le re!resenting all other minor forces that have not (een s!ecified-

Su(stituting this . function into a(ove yields

2 ln/ ( 0 ln/ 0 ln/ # 0 ln/ A # ( e e 0o =

, ,oln/ A 0 / 0ln/ 0 / 0ln/ # 0 ln/ ( 0 2 = + + + +

Solving this last e8uation for l n / (0 3e can 3rite the regression model as

, )oln/ ( 0 ln/ 0 ln/ # 0 2 = + + + +

't should (e noted that this regression e8uation suffers from the same !ro(lem all highly

aggregated e8uili(rium econometric models have F namely simultaneous e8uations (ias- :

: "n e#am!le of this is single e8uation estimation of real money demand that ty!ically treats real incomeand the interest rate as e#ogenous and inde!endent relative to the regression error term& des!ite the fact thatthat these are in fact endogenous in larger economic models of the economy-


15/44

e#t& consider the issue of real com!ensation to la(or in manufacturing- ?or

manufacturing firms& there is at least some rough evidence that la(or cost as a !ercentage

of total cost 3ill normally (e (et3een :A9=+;& not only for the US& (ut among a 3ide

variety of countries-

"ssuming the variation in the desired form of this ratio for the US is relatively small over

the !eriod of o(servation& and that it res!onds to a !articular set of varia(les& 3e can 3rite

,

4 4 4( P P S

P / 0 # (

= = =

3here total nominal com!ensation to la(or& P !rice of out!ut& and

ratio of total cost to total revenue- "s (efore& distinguishing (et3een actual and desired

8uantities& the relation in can (e transformed into a regression as

,o4

ln/ 0 ln/ # 0 2 P

= + + + < >

3here 2 re!resents a linear com(ination of other varia(les 3hich might im!act on the

real com!ensation of la(or-

?inally& manufacturing out!ut can (e analy%ed (y again starting 3ith an identity

d p p2 ) +

3here domestic demand for manufacturing &


16/44

the e#!orts of manufactures& and the im!ort of manufactures- E8uation is of

!aramount im!ortance in the controversy over 3hether Chinese im!orts are in fact

dis!lacing "merican domestic manufacturing out!ut- 't also sho3s ho3 that e#!orts can

(e im!ortant in offsetting any dis!lacement that may (e occurring due to such im!orts-

Beyond this& there is a structural issue concerning 3hether or not the US !u(lic is

s!ending more as a !ercentage of its of its dis!osa(le income on services and less on

manufactured goods- " country6s economy as it matures 3ill naturally e#!erience a

ra!idly e#!anding service sector over time-

e can re3rite as

, ,d d

5d

6 / 0/ 07DP / 0/ 07DP

7DP 7DP + = +

3here net e#!orts of manufactured goods and 3here is again a desired

8uantity de!ending numerous varia(les& O& including the e#change rate and IDP-

Ta ing logs of (oth sides and su(stituting desired for actual 8uantities allo3s us to 3rite

the regression e8uation for manufacturing out!ut 5 as

,oln/ 0 ln/ 7DP 0 2 = + + +

3here is a linear com(ination of other varia(les that are e#!ected to im!act on 5

through t3o of the three channels found on the right hand side of -


17/44

'H- Estimation and Results

The (asic regressions that have (een develo!ed in the !revious section& to assess the

im!ortance of changes in the value of the RMB on US manufacturing em!loyment& realcom!ensation& and out!ut& are sho3n in e8uations & < >& and & res!ectively- The

im!licit assum!tion (eing made a(out these e8uations is that they are sta(le over time&

meaning the !o!ulation !arameters are relatively unchanged& as are the structural

relations- .o3ever& cointegration tests 3ere run on the e8uations and it 3as found that

none of the e8uations dis!layed sufficient sta(ility to 3arrant use of standard

cointegration and error correction analysis- 'nstead& the varia(les 3ere differenced

and autoregressive models 3ere then fit to

these differenced varia(les- A The result 3as a relatively tight fit 3ith strong !arameter

sta(ility- Because of the !ossi(le !resence of autocorrelation and heteros edasticity& (oth

unad7usted and ."C9ad7usted t9tests are !rovided in the ta(les for com!arison-

Data is readily availa(le from the Bureau of $a(or Statistics& the St- $ouis ?ederal

Reserve data(an ?RED& and from ational Bureau of Statistics of China


18/44

e#change for one USD =- Thus& a rise in the RMB e#change rate is in fact a rise in the

value of the USD& as 3e have defined things- 't 3ill (e useful to ee! in mind that the

Chinese foreign e#change rate discussed in the !a!er is merely the value of the USD in

terms of the Chinese yuan-

To ease the e#!osition of results& the relevant regressions have (een !laced into grou!s for

com!arison- Ta(les ,9"& ,9B& ,9C and ,9D are concerned 3ith

the s!ecification of manufacturing em!loyment& as in e8uation a(ove- Irou! Ta(les )

and 1 are similarly concerned 3ith real manufacturing com!ensation

and manufacturing out!ut& res!ectively- e note that the construction of an accurate real

e#change rate is !ro(lematic& due to lac of com!rehensive data on trada(le goods and

services for (oth countries- "s a result& ta(les " and B of each of the Irou! Ta(les use

nominal values for !ur!oses of com!arison- ?or the !eriod& ,**:9)+,+ relative CP'

inde#es are used to construct a functional real e#change rate& (ut it should (e noted that

this data is !ro(a(ly contaminated 3ith heavy measurement error& not to mention the fact

that it s!uriously includes numerous non9trada(le goods and services- 'ndeed& it is argued

in this !a!er that most Chinese consumers are una(le to !urchase the ma7ority of

"merican goods& ma ing the notion of PPP rather 8uaint in this conte#t F des!ite the fact

that much controversy surrounds the movement in such real rates- Haria(les 3ere log9

differenced 3hen such differencing seemed natural- umerous regressions and

s!ecifications 3ere run and a !ortion of these are sho3n in ta(les (elo3- @ut of this large

set of regressions a num(er of recurring features and styli%ed facts 3ere o(served& some

of 3hich 3ere statistically significant according to eyman9Pearson testing and others

3hich 3ere not statistically significant& (ut nevertheless interesting in signs and

= The RMB is the formal name of the Chinese currency& 3hile the Chinese yuan refers to the units 3hich theRMB is denominated- This is some3hat li e calling the USD the Jgreen(ac J and saying it is denominatedin dollars-


19/44

magnitudes-

< i > Em!loyment Results

Regressions !resented in Irou! Ta(les , sho3 the effects of several varia(les on the

gro3th in US manufacturing em!loyment- ote that the de!endent varia(le refers to the

num(er of em!loyees in manufacturing and not to em!loyee hours or the !ercentage of

total em!loyment in manufacturing& The most im!ortant results that are im!lied (y these

ta(les are as follo3s F

Em!loyment gro3th a!!ears to (e most consistently sensitive to out!ut and

!roductivity gro3th- The signs are as e#!ected and are certainly statistically

significant- These t3o varia(les regressed alone account for 0,; of the variation in

em!loyment- The remaining variation is due entirely to changes in average 3or hours

and to measurement errors- Thus& if average 3or ing hours 3ere constant and there 3ere

no measurement errors to s!ea of& the regression 3ould revert to a deterministic identity

and the R ) 3ould (e ,- The regressions in Irou! Ta(le , therefore assume that there e#ist

varia(les that affect the desired average num(er of 3or ing hours& 3hich in turn varies

over time- Both gro3th in out!ut and !roductivity have strong effects- ?or e#am!le& a

dou(ling of the gro3th in industrial !roduction 3ould add half that amount to

em!loyment gro3th

The (usiness cycle indicator varia(le does not a!!ear to have a significant effect on the

gro3th in manufacturing em!loyment& inde!endent of the out!ut gro3th and !roductivity

gro3th factors mentioned a(ove- This might indicate that& aside from direct movements in

out!ut& the (usiness cycle does not affect em!loyment through a strong e#!ectations or


20/44

confidence effect- @ne im!ortant difficulty encountered 3ith this varia(le is that& for most

regressions& the !eriod of o(servation is ,**: F )+,+ and therefore there are only t3o

recessions that a!!ear in the data over this o(servational !eriod-

Changes in the com!osition of consum!tion& as re!resented (y movements in the

!ercentage of consum!tion devoted to dura(les& does not have a statistically significant

effect on the gro3th in manufacturing em!loyment- Part of this may have to due 3ith the

fact that a rising dura(le mar et gives rise to a strong service sector designed to service

the dura(le F for e#am!le& autos& cell !hones& com!uters& etc- Services to dura(les& 3hichmay (e outsourced& may rise faster than the dura(le mar et and cause a reduction of

em!loyment in the dura(le manufacturing sector- 'n any event& this varia(le does not

generally (ear a strong relation to movement to any of the three varia(les 3e are

consideringG namely em!loyment& real com!ensation& or out!ut- Much has (een made in

the literature a(out the rise of the service sector and ho3 this may adversely im!act on the

manufacturing sector& (ut this is hard to se!arate out from the other factors involved& such

as out!ut-

The value of the USD relative to the RMB is a statistically significant varia(le in

determining the value of manufacturing gro3th& (ut only 3hen e#!orts are e#cluded from

the e8uation- Regressions 3ith (oth varia(les included have (een omitted for (revity- 'f

e#!orts are included in the e8uation& the value of the dollar ceases to (e significant- @ne

!ossi(le reason for this is that the effect of changes in the RMB9USD e#change rate seems

to (e centered on e#!orts and not on im!orts- The value of the USD continues to have a

negative coefficient& (ut it is not longer significant 3hen used in con7unction 3ith total

real e#!orts- That is& a rise in the US dollar reduces em!loyment in US manufacturing


21/44

!rinci!ally (y reducing e#!orts of US firms to China- 'f (oth im!orts and e#!orts 3ere

se!arately im!acted& 3e 3ould e#!ect to see (oth the value of the dollar and e#!orts

remain significant varia(les 3hen (oth e#!lanatory varia(le are !resent- This is not the

case- This result is im!ortant since it says that concerns a(out Chinese im!orts are

some3hat mis!laced- Concern should (e instead focused on the e#tent to 3hich

movements in the RMB could induce greater e#!orts to China F something 3hich 3ould

go a long 3ay in reducing the trade im(alance that is giving rise to controversy-

"nother interesting as!ect of this result is that it does not matter 3hether one uses the

nominal e#change rate or the real e#change rate& the effect remains negative- That is& a

faster rise in the value of the RMB tends to increase US manufacturing em!loyment

gro3th- .o3ever& the si%e of this effect is not !articularly large- @ne reason 3hy that the

effect seems muted is that if the rise in the RMB is su(dued& trended& and therefore 3ell

e#!ected& then it 3ill li ely have little effect on China6s e#!orts to the US and im!orts

from the US- This is analogous to the testing of the effectiveness of a ne3 drug& 3here the

drug is administered in e8ual and highly controlled amounts& (ut nevertheless in doses

that are much too small to ma e a difference- @(servations 3ill sho3 that the drug is

hardly effective at all& and in some cases 3e may find that !atients 3orsen under the

treatment- "nti(iotics given in e5ce ivel# mall amounts may (e totally ineffective in

curing a !atient and can in some cases ma e the situation 3orse- This is not to say that the

RMB must go through a si%ea(le revaluation sim!ly to satisfy our curiosity- But& it does

!oint to the inherent difficulties in econometrically assessing the effectiveness of the

RMB 3hen changes in the RMB are so small-

'n fairness it should (e mentioned that !atients often die from overdoses of an other3ise !erfectly harmlessdrug- This is of course the danger of em!loying analogies in scientific arguments- But the alternative is ofcourse to use statistics& and this 3as the original !ur!ose of the analogy F to e#!lain 3hy 3e find a a small

(ut nevertheless statistically significant effect- @ne can never really no3 the true effect of a varia(le in aregression if its varia(ility is too small relative to the varia(ility of the other factors affecting the de!endentvaria(le-


22/44

The short run elasticity for changes in the value of the USD relative to the

RMB is incredi(ly small& even 3hen 3e find a statistically significant effect- " dou(ling

of the gro3th rate in the value of the RMB 3ould add a(out ,= (asis !oints of additional gro3th in US

manufacturing em!loyment


23/44

including (oth 3ages and (enefits- Unli e the other e8uations& the e8uation for real

com!ensation has a much lo3er R ) statistic& indicating that there are many idiosyncratic

factors at 3or in determining the gro3th of real com!ensation for manufacturing

3or ers-

"mong the factors considered in Irou! Ta(le )& the most im!ortant varia(les (y far are

again !roductivity and out!ut gro3th& as one might e#!ect- Regressions on these t3o

varia(les alone result in an R ) of +-,*& 3ith the signs on (oth !roductivity and out!ut

gro3th (oth as e#!ected- The second of these is related to a larger macroeconomic

issue of countercyclical 3ages- Iiven the gro3th of !roductivity for la(or& higher out!ut

is e#!ected to (e associated 3ith lo3er real 3ages- This 3as !redicted (y Keynes in ,*1=

and his !rediction su(se8uently (ecame the focus of an intense de(ate and controversy-

@ur regressions in Irou! Ta(le ) confirm Keynes6 !rediction of the countercyclical nature

of real 3ages-

The value of the USD in terms of the RMB is estimated to have a !ositive relation 3ith

the gro3th of real com!ensation- This might seem counter9intuitive& (ut a higher USD

means that 3ages earned (y em!loyees (uys more& es!ecially if there are many goods

(eing im!orted at lo3er e#change9ad7usted !rices from China- aturally& there is the issue

of factor !rice e8uali%ation 3hich 3ould normally o!erate to reduce 3ages to (e more inline 3ith 3ages in China- .o3ever& lo3 !riced im!orts from China ma e the real value

of US manufacturing 3ages higher than they 3ould (e other3ise- This result is very

im!ortant as it sho3s that many 3or ers in manufacturing 3ould in fact (e hurt (y a US

dollar that 3ea ens- $oo ed at in this 3ay& millions of 3or ers in manufacturing 3ould

ee! their 7o(s& even in the face of a stronger US dollar- Moreover& these 3or ers 3ill


24/44

e#!erience a rising avera,e real 3age as the dollar strengthens due to an increase in the

!urchasing !o3er of their nominal 3age- That is& 3ith some 3or ers losing their 7o(s on

the margin and overall em!loyment (eing hurt& the vast (ul of em!loyees in US

manufacturing 3ill gain from the higher !urchasing !o3er of their 3age- This argument

is similar to the effect of a rise in the minimum 3age- There is no dou(t that a rising

minimum 3age causes unem!loyment on the margin& (ut for the much greater set of

3or ers 3ho retain their 7o( after the 3age hi e& they e#!erience a higher real 3age and

therefore (enefit-

Manufacturing @ut!ut

ith res!ect to gro3th in manufacturing& the gro3th in US real IDP has an e#!ectedly

!rofound effect& as sho3n in Irou! Ta(le 1- This is due to the increase in demand for

manufactures& (oth !roducer and consumer goods& that occurs 3hen real IDP rises- @ver

=+; of the variation in in the gro3th of manufacturing out!ut can (e e#!lained (y this

single varia(le- "ddition of other e#!lanatory varia(les raises this an additional ,A; of

the variation in out!ut gro3th- The real value of the USD in terms of the RMB has the

e#!ected sign and an elasticity of a(out +-,+& 3hich is very lo3 (ut

considera(ly larger than the similar elasticity for em!loyment gro3th- " 3ea er USD F

stronger RMB leads to a gro3th in US manufacturing out!ut- "gain& 3e find that if realgro3th in US e#!orts is added to the e8uation& the elasticity on the real value of the dollar

dro!s (y , 1 and the coefficient (ecomes statistically insignificant- 'nterestingly& if 3e

(egin 3ith the unadorned (asic regression using only the gro3th in real IDP and then add

in the gro3th in the value of the dollar& the R ) rises a(out A; and the USD9RMB varia(le

is statistically significant- "dding real e#!orts then increases R ) (y another A; (ut the


25/44

coefficient on the value of the USD9RMB dro!s (y , 1 and (ecomes insignificant- This

a!!ears to (e evidence of a se!arate and 3ea effect of the RMB on manufacturing out!ut

gro3th& (ut still e#!ort gro3th dominates- @ne reason for this is !ro(a(ly that e#!ort

gro3th has much greater variation than does movements in the USD9RMB e#change rate-

This allo3s its effect to (e estimated more !recisely- 5et another !ro(lem is that the

Chinese government may see to defuse trade animosities (et3een itself and ashington

(y (oth slo3ly a!!reciating the RMB 3hile at the same time increasing !urchases of US e#!orts- 'f this is true& then it may (e difficult

se!arating the effect of a rising RMB from a rising 8uantity of im!orts from the US- Both

3ill (e occurring during the !eriod of ad7ustment and (oth 3ill have an effect on US

manufacturing out!ut gro3th-

H- Conclusions

The a!!ro!riate value of the RMB has (ecome a focal !oint of controversy (et3een the

US and China- Many o(servers in the US claim that China is continuing to !rotect its

manufacturing (ase and e#!and it current account sur!lus (y artificially ee!ing the value

of the RMB lo3 relative to the US dollar- They assert that a su(stantial revaluation of the

RMB 3ould hel! to reduce China6s (ilateral trade sur!lus 3ith the US and this 3ould

foster higher out!ut& em!loyment and real 3ages in the US manufacturing sector- The

common vie3 among these researchers is that the RMB should a!!reciate (et3een ,);

to =+;& de!ending on the analysis used- China has res!onded in many 3ays& !artly (y

allo3ing a slo3 and steady revaluation and !artly (y arguing among other things that

revaluation of the RMB 3ill not (alance trade flo3s since the US9China im(alance is

caused (y many other factors& including a lac of saving on the !art of "mericans-


26/44

This !a!er uses highly aggregated time series data on US manufacturing to assess the

claim that a rise in the RMB 3ould significantly ameliorate US

manufacturing !erformance& es!ecially 3ith regard to gro3th in em!loyment& real 3ages&

and out!ut- " num(er of results 3ere found-

?irst& there is evidence that a rise in the RMB has a !ositive and statistically significant

relation on em!loyment gro3th in US manufacturing- .o3ever& this relation is not large

in magnitude and therefore is economically inconse8uential& given !ast movements in the

RMB- .o3ever& it is !ossi(le that larger movements in the RMB might generate even

larger !ercentage movements in the gro3th of US em!loyment- But& since no such

movements have (een forthcoming since ,**:& it is im!ossi(le to identify ho3 that

em!loyment 3ould react to larger increases in the value of the Chinese yuan-

Second& granted that increases in the RMB might increase em!loyment in US

manufacturing& these effects are d3arfed (y much larger effects if gro3th of US e#!orts

are included in the regressions- That is& autonomous increases in e#!orts a!!ear to (e

more im!ortant than currency revaluations& meaning that mar et o!ening initiatives for

China may have much larger effects on US em!loyment than a sim!le increase in the

RMB- " stronger RMB !ro(a(ly hel!s Chinese (uy "merican !roducts& (ut this is not

o(vious 3hen e#!orts are e#cluded from the regressions- Barriers to "merican !roductsare !ro(a(ly more im!ortant to Chinese consumers than the value of the RMB- This fits

3ell into the notion that Chinese households are saving at very high rates- The u!shot here

is that the trade im(alance is !ro(a(ly influenced more (y mar eting channels F smooth

and o!en from China to US and difficult and narro3 from US to China F than (y any

undervaluation of the RMB- Hie3ed in this 3ay& the (arriers to mar eting channels are a


27/44

significant !art of the full !rice of US !roducts to Chinese& even after correction (y a

!ossi(le undervalued RMB-

Third& (oth out!ut gro3th and !roductivity gro3th have !rofound effects on the gro3th of

em!loyment in US manufacturing F far greater than anything that could (e achieved (y

revaluation of the RMB- Hariations in out!ut gro3th& es!ecially over the (usiness cycle

have an enormous influence on em!loyment& 3hile gro3th of !roductivity has a clear

inverse relation 3ith em!loyment gro3th- This is as 3e 3ould e#!ect and confirms 3hat

many have claimed is going on in most of the develo!ed countries of the 3orld- Thus&

much of the !ain in US manufacturing is due to the (usiness cycle and normal gro3th in

!roductivity-

?ourth& the gro3th in real com!ensation of US manufacturing 3or ers is negatively

related to the value of the RMB - Essentially

this can (e e#!lained (y saying that a rise in the RMB is associated 3ith a fall in the value

of the USD- Those 3or ers in manufacturing 3ho retain their 7o(s must (uy goods at a higher !rice due to the falling USD and this

lo3ers the real 3age they are !aid- e should note that this is fully aggregated

manufacturing data and that there may very 3ell (e differing effects on certain su(9

industries 3ithin the overall manufacturing industry& es!ecially those small sets of su(9industries that are in direct com!etition 3ith Chinese im!orts- More detailed US data

needs to (e considered to ma e a definitive statement a(out real com!ensation-

?ifth& the gro3th in real com!ensation to manufacturing 3or ers is strongly related to the

gro3th in !roductivity& sho3ing that !roductivity gro3th is a t3o9edged s3ord 3hich


28/44

eliminates em!loyment in manufacturing on the one hand 3hile raising real com!ensation

for those 3ho retain their 7o(s on the other hand-

Si#th& there is a small (it of evidence that revaluation of the RMB 3ould !romote greater

gro3th in manufacturing out!ut& (ut this is again over3helmed (y real e#!ort gro3th

3hen e#!orts enter the regression- $i e em!loyment& mar et o!ening initiative a!!ear to

(e a (etter means of s!urring out!ut gro3th in the future& com!ared 3ith increases in the

RMB- This vie3 ho3ever is (ased on historical movements in the RMB and cannot hel!

in determining 3hat might ha!!en if the RMB 3ere to rise su(stantially-

The overall results of this em!irical study seem to indicate that US officials& researchers&

and commentators 3ho are ma ing strong calls for revaluation of the RMB are focusing

on the 3rong channel of influence and should instead (e loo ing to (etter o!en China6s

vast consumer and !roducer mar ets to "merican goods- "s China6s mar eting structure

moderni%es and domestic firms arise 3ith a national reach& US manufacturers should

consider utili%ing these firms through 7oint ventures to hel! mar et their !roducts to

Chinese consumers- This is not to say that RMB valuations are not im!ortant& (ut such

revaluations are more li ely to (enefit Chinese macroeconomic& (an ing& and financial

sta(ility rather than ma e su(stantial changes in the (ilateral trade im(alance 3ith the US-

References

Baugh& B- / 5ud en& 2-& )++=- 's Deindustriali%ation 'nevita(le- e3 $a(or ?orum&

,A& !!-AA9=:-

Bergsten& C-?-& )+,+a- Correcting the Chinese E#change Rate& ashington& DC-

Bergsten& C-?-& )+,+(- e Can ?ight ?ire 3ith ?ire on the Renmin(i- ?inancial Times-


29/44

Bernard& "-& )++*- Trends in Manufacturing- Pers!ectives& Statistics Canada& < A9++,9O>& !!-A9,1-

Chan& S-& )+,+- Currency Rift ith China E#!oses Shifting Clout- e3 5or Times-

Cheung& 5-9 -& Chinn& M-D- / ?u7ii& E-& )+,+- Measuring Misalignment4 $atestEstimates for the Chinese 5uan-

Cline& -R-& )+,+- Renmin(i Undervaluation& Chinas Sur!lus& and the US Trade Deficit-

Peterson 'nstitute for 'nternational Economics& & !!-,9 -

Dertou%os& Michael $& Richard K- $ester& and Ro(ert Solo3- ,*0*- )ade in America* +e,ainin, the Productive (d,e & The M'T Press& Cam(ridge& M"-

Ed3ards& $- / $a3rence& R-N-& )+,+- US Trade and ages4 The Misleading 'm!licationsof Conventional Trade Theory& ashington& DC4 Peterson 'nstitute for 'nternational

Economics-

?air& R-C-& )+,+- Estimated Macroeconomic Effects of a Chinese 5uan "!!reciation-

Business Economics& :A& !!-)119):1-

?ran el& 2-"- / ei& S-92-& )++ - "ssessing Chinas e#change rate regime- EconomicPolicy& !!-A A9=) -

Ioldstein& M- / $ardy& -& )++=- "ssociation Chinas E#change Rate Policy Dilemma-

The "merican Economic Revie3& *=& !!-:))9:)=-

Iris3old& D-& ,***- Trade& 2o(s& and Manufacturing4 hy U-S- or ers

Should elcome 'm!orts- Cato 'nstitute4 Trade Briefing Pa!er& < o-=>& !!-,9,:-

.ale& D-D- / .ale& $-.-& )++0- Reconsidering Revaluation The rong "!!roach to theU-S-9Chinese Trade 'm(alance- ?oreign "ffairs& !!-,9:-

.art9$ands(erg& M-& )+,+- The U-S- Economy and China4 Ca!italism& Class& and Crisis 44

Monthly Revie3- Monthly Revie3& =,-

.ill& Carter R- & Iriffiths& illiam E- / $im& Iuay C- )++0- Princi!les of Econometrics&


30/44

1rd edition- 2ohn iley / Sons& e3 2ersey-

.sieh& C-9T- / @ssa& R-& )+,,- " Ilo(al Hie3 of Productivity Iro3th in China&

Cam(ridge& M"4 ational Bureau-

'to& T-& )+,+- Chinas !ro!erty (u((le is 3orse than it loo s- The ?inancial Times-

2ohnson& 2r-& -"-& )++*- 'm!act of Ilo(ali%ation and Trade 3ith China on e3 5or

Com!anies and Communities& Testimony (efore the U-S- F China Economic andSecurity Commission-

Kollmeyer& C-& )++*- E#!laining Deindustriali%ation4 .o3 "ffluence& Productivity

Iro3th& and Ilo(ali%ation Diminish Manufacturing Em!loyment- The "merican2ournal of Sociology& ,,:& !!-,=::9,= :-

$u & S-K-& )+,+- Understanding Chinese Renmin(i "!!reciation4 " Microfounded Model3ith 'm!erfect Ca!ital Mo(ility-

Ma& I- / McCauley& R- -& )+,,- The evolving renmin(i regime and im!lications for

"sian currency sta(ility- 2ournal of 2a!anese 'nternational Economies& )A& !!-)1910-

McKinnon& R-& )++=- "ssociationChinas E#change Rate Tra!4 2a!an Redu# The

"merican Economic Revie3& *=& !!-:) 9:1,-

Montresor& S- / Mar%etti& I-H-& )+,,- The deindustrialisation tertiarisation hy!othesisreconsidered4 a su(system a!!lication to the @ECD - Cam(ridge 2ournal of

Economics& 1A& !!-:+,9:),-

Morrison& -M-& )+,+- China9U-S- Trade 'ssues& ashington& DC4 Congressional

Research Service-

Morrison& -M- / $a(onte& M-& )+,+- Chinas Currency4 "n "nalysis of the Economic'ssues& ashington& DC4 Congressional Research Service-

ic ell& S-& Redding& S- / S3affield& 2-& )++0- The Uneven Pace of Deindustrialisation in

the @ECD- The orld Economy& !!-,91,-

in& D- / .e& O-& )+,+- 's the Chinese Currency Su(stantially Misaligned to arrant


31/44

?urther "!!reciation & E7ournal-org-

Rich& D-& )+,+- Changing Elasticities of $a(or Demand in U-S- Manufacturing- "tlantic

Economic 2ournal& 10& !!-,A 9,=0-

Rima& '-& )+,+- The Political Economy of the Undervalued Renmin(i& Philadel!hia&

Pennsylvania4 Tem!le University-

Ro3thorn& R- / Coutts& K-& )++:- De9industriali%ation and the Balance of Payments in"dvanced Economies& e3 5or 4 United ations Conference on Trade and

Develo!ment-

Sachs& 2-D- et al-& ,**:- Trade and 2o(s in U-S- Manufacturing- Broo ings Pa!ers onEconomic "ctivity& ,**:& !!-,90:-

Sato& K-& Shim%u& 2- / Nhang& N-& )+,+- e3 Estimates of the E8uili(rium E#changeRate4 The Case for the Chinese Renmin(i- R'ET' Discussion Pa!er& Series ,+9E9+:A&

!!-,9):-

Su(ramanian& "-& )+,+- e3 PPP9Based Estimates of Renmin(i Undervaluation and

Policy 'm!lications& ashington& DC4 Peterson 'nstitute for 'nternational Economics-

Thor(ec e& -& )+,+- ill a(andoning the dollar !eg hel! China re(alance its economyvo# 9 Research9(ased !olicy analysis and commentary from leading economists&

!!-,9:-

Tyers& R- / Nhang& 5-& )+,,- "!!reciating the Renmin(i- The orld Economy-

halley& 2- / ang& $-& )+,,- The im!acts of Renmin(i a!!reciation on trade flo3s and

reserve accumulation in a monetary trade model- Economic Modelling& )0& !-=,:F =),-

oo& -T-& )++0- Understanding the Sources of ?riction in U-S-FChina Trade Relations4

The E#change Rate De(ate Diverts "ttention from @!timum "d7ustment- "sianEconomic Pa!ers& & !!-=A9**-

Oing& 5-& )+,+- The 5uans E#change Rates and Pass9through Effects on the Prices of

2a!anese and US 'm!orts& To yo4 "sian Develo!ment Ban 'nstitute-


32/44

5u& M-& )+,+- Does "!!reciation of the RMB Decrease 'm!orts to the U-S- from China &Bei7ing4 China Center for Economic Research-


33/44

Table 1A

Nominal OLS Regressions/Without Exports*

Dependent ariable ! "er#entage $hange in %anu&a#turing Emplo'ment

E(uation

ariable , ) 1 :

constant +-++10A 9+-++)+ +-++D, 9+-++):

+-:*0+ +-:0,+ +-:*++ +-:A0+

9+-10,* 9+-101+ 9+-11,) 9+-1:)0

9+-++A+ 9+-++AA 9+-++A1 9+-++=)

cycleTinde# 9+-+++0 T 9+-+++0 T

;TdurTcons 9+-+:,) T 9+-+=A, T

log t9, +-))*D +-))=D +-1,)D +-1+=,

log t9)

+-,0*A +-,=*= +-,1D0 +-,+0+

Sam!le Period 0D4: ,+4: 0D4: ,+4: *:4, ,+4: *:4, ,+4:

o- @(s- *1 *1 =0 =0

R9s8 +-0* +-0* +-0* +-*+

."C Est- o 5es o 5es

$M "uto !9value +-:0 T +-,, T

$M .etero !9value +-,A T +-), T

ote4 "ll regressions in Ta(les ," and ,B a(ove use the nominal e#change rate - Regressions em!loying the real

e#change rate as ad7usted (y the relative CP's of the US and China are contained in Ta(les ,C and ,D-


34/44

Table 1)

Nominal OLS Regressions ith Exports


E(uation

ariable , ) 1 :

const +-++1, +-++1, +-++:1 +-++:1

+-::*1 +-::*1 +-:1:= +-:1:=

9+-1A+D 9+-1A+D 9+-)*** 9+-)***

9+-++1* 9+-++1* 9+-++1, 9+-++1,

cycle inde# 9+-+++: 9+-+++: 9+-++,0 9+-++,0

; dur cons 9+-+:,, 9+-+:,, 9+-+::D 9+-+::D

+-+):+ +-+):+ +-+)=+ +-+)=+

Vlog t+1 +-))+* +-))+* +-1,,) +-1,,)

Vlog t+, +-)+0* +-)+0* +-,A== +-,A==

Sam!le Period 0D4: ,+4: 0D4: ,+4: *:4, ,+4: *:4, ,+4:

o- @(s- *1 *1 =0 =0

$M "uto !9value +-)0 T +-+A T

$M .etero !9value +-,* T +-)A T


35/44

Table 1$

Real OLS Regressions/Without Exports


E(uation

ariable , ) 1 :

constant +-++:D, +-++:D, 9+-++1+ 9+-++1+

+-:00+ +-:00+ +-:=:* +-:=:*

9+-11+* 9+-11+* 9+-11D= 9+-11D=

9+-+)=) 9+-+)=) 9+-+:)D 9+-+:)D

cycleTinde# 9+-++,A 9+-++,A T T

;TdurTcons 9+-+A+) 9+-+A+) T T

log t9, +-1+)* +-1+)* +-)*+= +-)*+=

log t9)

+-,),D +-,),D +-+*)0 +-+*)0

Sam!le Period *:4) ,+4: *:4) ,+4: *:4) ,+4: *:4) ,+4:

o- @(s- =D =D =D =D

R9s8 +-*, +-*, +-*+ +-*+


$M "uto !9value +-,,1 T +-1,) T

$M .etero !9value +-,D T +-+)) T


36/44

Table 1D

Real OLS Regressions/With Exports


E(uation

ariable , ) 1 :

constant +-++101 +-++101 9+-++)= 9+-++)=

+-:1++ +-:1++ +-1*+, +-1*+,

9+-)*0: 9+-)*0: 9+-1++A 9+-1++A

cycleTinde# 9+-++,* 9+-++,* T T

;TdurTcons 9+-+10A 9+-+10A T T

log +-+1,, +-+1,, +-+1D1 +-+1D1

log t9, +-1,)= +-1,)= +-)**+ +-)**+

log t9)

+-,=++ +-,=++ +-,:D: +-,:D:

Sam!le Period *:4) ,+4: *:4) ,+4: *:4) ,+4: *:4) ,+4:

o- @(s- =D =D =D =D

R9s8 +-*, +-*, +-*, +-*,


$M "uto !9value +-:0 T +-,, T

$M .etero !9value +-,A T +-), T


37/44

Table ,ANominal OLS Regressions Without Exports

Dependent ariable ! "er#entage $hange in %anu&a#turing Real $ompensation

E(uations

ariable , ) 1 :

constant 9+-+,1A 9+-++0+ 9+-+)+* 9+-++0A

9+-:**+ 9+-:*=+ 9+-A,1+ 9+-A,)+

+-=D++ +-==:1 +-=A++ +-=A1:

9+-++A= 9+-++:* +-+,+: +-+,,,

cycle inde# +-++0: +-++*+ +-++D* +-++*=

; dur cons +-+:DD T +-,,), T

Sam!le Period 0D4: ,+4: 0D4: ,+4: *:4, ,+4: *:4, ,+4:

o- @(s- *1 *1 =0 =0

R9s8 +-)1 +-)1 +-): +-)1


$M "uto !9value +-:0 T +-:= T

$M .et !9value +-** T +-D+ T


38/44

Table ,)

Nominal OLS Regressions With ExportsDependent ariable ! "er#entage $hange in %anu&a#turing Real $ompensation

E(uations

ariable , ) 1 :

constant 9+-+,1A 9+-++0+ 9+-+)+* 9+-++0A

9+-:**+ 9+-:*=+ 9+-A,1+ 9+-A,)+

+-=D++ +-==:1 +-=A++ +-=A1:

9+-++A= 9+-++:* +-+,+: +-+,,,

cycle inde# +-++0: +-++*+ +-++D* +-++*=

; dur cons +-+:DD T +-,,), T

log 9+-+D1, 9+-+D1, 9+-+D:+ 9+-+D:+

Sam!le Period 0D4: ,+4: 0D4: ,+4: *:4, ,+4: *:4, ,+4:

o- @(s- *1 *1 =0 =0

R9s8 +-)1 +-)1 +-)= +-)=


$M "uto !9value +-:0 T +-): T

$M .et !9value +-** T +-0* T


39/44

Table ,$

Real OLS Regressions Without ExportsDependent ariable ! "er#entage $hange in %anu&a#turing Real $ompensation

E(uation

ariable , ) 1 :

constant 9+-+))1 9+-+))1 9+-++0= 9+-++0=

9+-A,0, 9+-A,0, 9+-A,1A 9+-A,1A

+-==)+ +-==)+ +-=AD1 +-=AD1

9+-+,:, 9+-+,:, 9+-++,, 9+-++,,

cycleTinde# +-++0+ +-++0+ +-++*D +-++*D

;TdurTcons +-,)+: +-,)+: T T

Sam!le Period *:4) ,+4: *:4) ,+4: *:4) ,+4: *:4) ,+4:

o- @(s- =D =D =0 =D

R9s8 +-): +-)1 +-): +-)1


$M "uto !9value +-:0 T +-:0 T

$M .et !9value +-01 T +-A+ T


40/44

Table ,D

Real OLS Regressions With ExportsDependent ariable ! "er#entage $hange in %anu&a#turing Real $ompensation

E(uation

ariable , ) 1 :

constant 9+-+,:* 9+-+,:* 9+-++DA 9+-++DA

9+-:)DA 9+-:)DA 9+-:,+) 9+-:,+)

+-=,*1 +-=,*1 +-=,:D +-=,:D

9+-+:A1 9+-+:A1 9+-+A:+ 9+-+A:+

cycleTinde# +-++0+ +-++0+ +-++00 +-++00

;TdurTcons +-+=AD +-+=AD T T

Sam!le Period *:4) ,+4: *:4) ,+4: *:4) ,+4: *:4) ,+4:

o- @(s- =D =D =D =D

R9s8 +-): +-): +-): +-):


$M "uto !9value +-1: T +-)= T

$M .et !9value +-0) T +-=* T


41/44

Table -ANominal OLS Regressions Without Exports

Dependent ariable ! "er#entage $hange in the .S /ndustrial "rodu#tion /ndex

E(uations

ariable , ) 1 :

constant +-++)A 9+-++00 9+-++,: 9+-++**

,-)1A+ ,-,**+ ,-,D*+ ,-,:D+

cycle inde# +-++=+ +-++A1 +-++DD +-++=*

9+-++:D 9+-++=D 9+-+,:: 9+-+,A)

; dura(les 9+-+*=+ T 9+-+D=+ T

+-=)=: +-=11, +-=0=* +-=*=A

9+-)=A= 9+-)01: 9+-1+*0 9+-1)),

Sam!le Period 0D4: ,+4: 0D4: ,+4: *:4, ,+4: *:4, ,+4:

o- @(s- *1 *1 =0 =0

R9s8 +-0+ +-0+ +-01 +-01


$M "uto T T

$M .etero T T


42/44

Table -)

OLS Regressions With ExportsDependent ariable ! "er#entage $hange in the .S /ndustrial "rodu#tion /ndex

E(uations

ariable , ) 1 :

constant 9+-+++0 9+-+++0 9+-+,)A 9+-+,)A

,-+0+* ,-+0+* +-*D10 +-*D10

cycle inde# +-++=* +-++=* +-++D) +-++D)

9+-++,+ 9+-++,+ 9+-++:) 9+-++:)

; dura(les 9+-+DAA 9+-+DAA +-+,** +-+,**

Vlog

+-+=A: +-+=A: +-+0:1 +-+0:1

Vlog t+1 +-A1== +-A1== +-AA)* +-AA)*

Vlog t+, 9+-)1,0 9+-)1,0 9+-):1) 9+-):1)

Sam!le Period 0D4: ,+4: 0D4: ,+4: *:4, ,+4: *:4, ,+4:

o- @(s- *1 *1 =0 =0

R9s8 +-0, +-0, +-0A +-0A


$M "uto ! value +-+, T +-+0 T

$M .etero ! value +-+) T +-+1 T


43/44

Table -$Real OLS Regressions Without Exports

Dependent ariable ! "er#entage $hange in the .S /ndustrial "rodu#tion /ndex

E(uations

ariable , ) 1 :

constant 9+-++1: 9+-++1: 9+-+,+D 9+-+,+D

,-,*+0 ,-,*+0 ,-,D*+ ,-,D*+

cycleTinde# +-++0+ +-++0+ +-++DD +-++DD

9+-+1)1 9+-+1)1 9+-+:+D 9+-+:+D

;Tdura(les 9+-+=1= 9+-+=1= T T

+-=01A +-=01A +-=0*A +-=0*A

9+-1))= 9+-1))= 9+-11A* 9+-11A*

Sam!le Period *:4) ,+4: *:4) ,+4: *:4) ,+4: *:4) ,+4:

o- @(s- =D =D =D =D

R9s8 +-01 +-01 +-01 +-01


$M "uto !9value +-+, T +-+) T

$M .etero !9value +-++ T +-++ T


44/44

Table -D

Real OLS Regressions With ExportsDependent ariable ! "er#entage $hange in the .S /ndustrial "rodu#tion /ndex

E(uations

ariable , ) 1 :

constant 9+-+,1+ 9+-+,1+ 9+-++:= 9+-++:=

+-*D:+ +-*D:+ ,-,+)* ,-,+)*

cycle inde# +-++=0 +-++=0 K K

; dura(les +-+1+0 +-+1+0 K K

Vlog

+-+*++ +-+*++ +-+0:, +-+0:,

Vlog t+1 +-AA1* +-AA1* +-=)+0 +-=)+0

Vlog t+, 9+-)10: 9+-)10: 9+-),:A 9+-),:A

Sam!le Period *:4) ,+4: *:4) ,+4: *:4, ,+4: *:4, ,+4:

o- @(s- =D =D =0 =0

R9s8 +-0A +-0A +-0A +-0A


$M "uto ! value +-+ T +-+0 T

$M .etero ! value +-+* T +-+1 T

us manufacturing

Documents