Chapter 10. The Impact of the Exchange Rate
10.4 Effect of the RMB Appreciation on the
People always think that China mainly exports labor-intensive prod- ucts when, in fact, the country’s export products with science and technology content are rapidly increasing in number. Since 2009, computer exports have exceeded clothing exports, and the former ranks first among export commodities. Other commodities of high science and technology content, such as equipment for scientific research, electronics, and acoustics, have high export prices. Peo- ple always see large quantities of cheap labor-intensive products like clothing, shoes, and hats being exported (Table 10.9). In 2011, among China’s export commodities, machinery products totaled $1.0855 trillion, accounting for 57.1% of total exports; this figure includes electric equipment and electronic products amounting to $445.79 billion and machinery equipment amounting to $353.7, accounting for 18.6% of the total exports. Traditional export commodities, such as clothing, textile, and shoes, accounted for only 15% of the total exports.4
Electronic products, mostly spare parts for assembly, rank first among China’s import commodities. Raw materials such as iron ore, oil, and energy account for a large proportion of China’s imports. The
4Source:People’s Daily, January 11, 2012.
322 From Trade Surplus to the Dispute over the Exchange Rate
Table 10.8: Effect of the RMB appreciation on the departments of processing trade and general trade (million USD).
REX 1 REX 2 REX 5 REX 10 REX 15 REX 20 Processing Trade
Crop 3 6 14 30 45 61
Livestock 8 17 42 86 132 180
Forestry 0 0 1 2 3 5
Fishery 0 0 0 1 1 2
Coal 0 0 1 1 2 3
Oil 1 3 7 15 23 32
Mineral mining and smelting
9 18 44 91 140 192
Meat and dairy products
5 10 25 51 79 109
Food processing industry
0 −1 −2 −3 −5 −8
Drinks and tobacco products
10 20 50 101 155 211
Textile 22 45 114 233 358 489
Clothing −31 −62 −157 −322 −496 −679
Leather products −20 −39 −101 −211 −332 −464
Wood products −6 −13 −33 −68 −106 −146
Paper products 2 4 10 20 30 41
Oil and coal products 1 2 6 12 18 24
Chemical, rubber, and plastic products
79 159 403 825 1266 1728
Mineral products 10 19 49 101 154 210
Ferrous metal and its products
12 25 62 127 194 264
Non-ferrous metal and its products
54 108 274 558 854 1162
Metal Products 7 14 35 71 109 147
Automobile and automobile parts
−4 −9 −22 −46 −71 −97 Transportation
equipment
−22 −44 −110 −225 −346 −472 Electronic equipment −84 −168 −427 −873 −1342 −1835 Machinery and
equipment
−136 −273 −691 −1406 −2149 −2921 Other manufacturing
industries
−56 −113 −287 −587 −900 −1229 (Continued)
The Impact of the Exchange Rate Adjustment on Import and Export 323
Table 10.8: (Continued)
REX 1 REX 2 REX 5 REX 10 REX 15 REX 20 General Trade
Crop 23 46 112 216 309 389
Livestock −4 −8 −20 −44 −71 −102
Forestry −11 −22 −56 −114 −177 −244
Fishery −1 −1 −3 −7 −11 −16
Coal 0 0 −1 −3 −5 −8
Oil 89 179 452 921 1408 1915
Mineral mining and smelting
91 182 461 940 1437 1955
Meat and dairy products
−6 −13 −33 −70 −113 −160 Food processing
industry
−4 −8 −22 −50 −84 −127 Drinks and tobacco
products
−8 −16 −41 −85 −129 −176
Textile −114 −229 −581 −1194 −1841 −2526
Clothing −143 −286 −725 −1481 −2271 −3099
Leather products −46 −93 −237 −486 −750 −1030
Wood products −91 −183 −463 −945 −1447 −1971
Paper products 0 0 1 4 10 17
Oil and coal products 16 32 81 165 254 348
Chemical, rubber, and plastic Products
−46 −92 −228 −449 −663 −866
Mineral products −35 −70 −177 −360 −548 −741
Ferrous metal and its products
−16 −33 −82 −163 −242 −318 Non-ferrous metal and
its products
−26 −52 −130 −260 −388 −514
Metal products −68 −137 −345 −698 −1059 −1429
Automobile and automobile parts
−7 −13 −32 −60 −84 −102 Transportation
equipment
−34 −69 −173 −349 −527 −707 Electronic equipment −57 −115 −283 −557 −817 −1062 Machinery and
equipment
−158 −316 −789 −1567 −2332 −3079 Other manufacturing
industries
−30 −59 −149 −302 −458 −618
Source: GEMPACK simulation results.
324 From Trade Surplus to the Dispute over the Exchange Rate
Table 10.9: Composition of China’s import and export commodities (2009, $1 billion).
Exports Imports
Computer 111.9 22.7
Clothing 107.3 1.8
Scientific research equipment 31.4 55.2
Shoes 28.0 0.9
Electronic product 24.0 120.2
Sound equipment 21.5 3.5
Special industrial equipment 17.1 24.9
Toy 7.8 0.1
Vegetable 7.5 1.2
Oil 2.2 89.3
Rice 0.5 0.2
Soybean 0.2 18.8
Iron Ore 0.2 85.9
Source: United Nations, Statistics Division, UN Com- trade Database. Quoted from Pugel (2011), Interna- tional Trade, 15th ed, p. 82.
country is self-sufficient in grain production and even exports some grains. Soybeans mainly used for breeding aquatic products, poultry, and livestock are imported at a large scale, and a large amount of shrimps and meat are exported.
The RMB appreciation has great effects on the export of labor- intensive products. The exports of seven major labor-intensive prod- ucts, namely, textile, clothing, footwear, bag, furniture, toy, and plastic products, clearly decreased. Since the third quarter of 2010, China’s share of export products has dropped by 1.3% in the U.S.
market, 1% in the European market, and 0.6% in the Japanese market.5
The extent of decline in the exports of labor-intensive products is lower than that in the CGE simulation results. The main rea- son is that China enjoys a certain unit labor cost advantage in the labor-intensive product market. If the RMB appreciates slightly, the
5Source: the speech of Vice Minister of Commerce Zhong Shan on the National Trade Promotion Working Conference on January 9, 2012.
The Impact of the Exchange Rate Adjustment on Import and Export 325
competitive advantage of products made in China will not be offset and the orders will not move. However, if it appreciates much, the orders will inevitably move to other countries, leading to an increase in the unemployment rate in China.
After the RMB appreciation, the trade surplus of exports belong- ing to general trade in the new high-technology product market decreases, but that of new high-technology products, primarily in intra-industry trade, increases every year. As a result, the effect of the RMB appreciation on the trade surplus of new high-technology prod- ucts is not significant. In 2005, the RMB exchange rate appreciated by about 1% against the USD. In the same year, the trade surplus of high-tech products expanded by 179.8%. In 2006, the RMB exchange rate appreciated by 2.7%, and the trade surplus of high-tech prod- ucts grew by 44.6%. In 2008, the RMB exchange rate appreciated by 8.7%, but the trade surplus of high-tech products continued to grow by 30.3%. In 2009, because of the shrinking external demand, the export of high-tech products dropped, and the surplus decreased by 18.1% over that of the previous year (Table 10.10).
Table 10.10: RMB exchange rate and trade surplus of high-tech products.
RMB exchange rate
against the USD
Rate of change in the RMB exchange rate
against the USD (%)
Trade surplus of high-tech
products ($100 million)
Rate of change in the trade
surplus of high-tech products (%)
2004 8.3 — 4296.3 —
2005 8.2 −1.0 12020.6 179.8
2006 8.0 −2.7 17376.2 44.6
2007 7.6 −4.6 27804.9 60.0
2008 6.9 −8.7 36239.9 30.3
2009 6.8 −1.6 29682.7 −18.1
2010 6.8 −0.9 36819.1 24.0
Notes: High-tech products mainly include mechanical and electrical products, machinery and equipment, medical apparatuses and instruments, automatic data processing equipment, and others. See Hatzichronoglou, T. (1997). Revision of the high-technology sector and product classification. OECD Science Technology and Industry Working Papers, No. 1997/02 for a detailed classification.
Source: CEInet database.
326 From Trade Surplus to the Dispute over the Exchange Rate
China’s trade surplus can be decomposed into trade surpluses of products with high science and technology content and those with low science and technology content. After entering the new century, products with high science and technology content accounted for a growing proportion of the trade surplus of China against the U.S.
According to OECD statistics, China’s trade surplus against the U.S. was $226.8 billion in 2009, with industrial products (including products with low and high science and technology content) account- ing for 86%. Of this surplus, $91.7 billion came from products such as precision instruments, communication, electronics and other high- tech products that have high science and technology content, and
$103.2 billion came from labor-intensive products, such as textiles.
North America is the largest market in the world and the main destination of China’s merchandise exports. People usually think that China mainly exports labor-intensive products to the U.S. However, statistics shows otherwise. In 2009, the import commodities from China accounted for 19.3% of the total imports of the U.S., with exports of low-tech manufactured products, medium- and low-tech products, medium- and high-tech products, and high-tech products accounting for 36.9%, 15.4%, 13.5%, and 28.3% of the total amount of China’s imports of these products to the U.S., respectively. Impres- sively, IT products imported from China accounted for 40.3% of U.S.
imports.
The U.S. imported large quantities of low-tech products, such as textiles, toys, and umbrellas, from China, but the total amount was only $109.1 billion. The high-tech products imported from China to the U.S. include IBM computers, iPads, digital cameras, and mobile phones, among others, totaling $110.9 billion, more than the total value of the low-tech products. In 2009, the high-tech products exported from the U.S. to China totaled $19.2 billion; conversely, the low-tech products exported from the U.S. to China, such as agri- cultural products and raw materials, totaled $5.9 billion. With its comparative advantage in the high-tech field, the U.S. should export more high-tech products to China to achieve a balance in bilateral trade. However, it only exports small quantities, reflecting the largest distortion in the Sino-U.S. trade (Fig. 10.3).
The Impact of the Exchange Rate Adjustment on Import and Export 327
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
High tech. manufacturing products Mid-high tech. manufacturing products Mid-low tech. manufacturing products Low tech. manufacturing products IT products
Figure 10.3: Shares of Chinese products in U.S. imports.
Notes: High-tech manufactured products are composed of medicine, computer, radio, television, communication equipment, precision instruments, and optical instruments for medical use, aircraft, and spacecraft; medium- and high-tech prod- ucts are composed of chemical and mechanical equipment, electrical machinery and equipment, automobile, railway equipment, and other transport equipment;
medium- and low-tech products are composed of metal, coke, oil products, rub- ber and plastic products, and metal products. Low-tech products are composed of textile, paper products, wood products, food, beverages, and tobacco products.
Source: OECD STAN analysis bilateral trade database.
The CGE simulation results show that the RMB appreciation has a smaller effect on the trade surplus of high-tech products, such as those in the electronic equipment manufacturing industry, than on the trade surplus of traditional low-tech, labor-intensive prod- ucts (Table 10.11). In fact, most high-tech products exported from China are in the processing trade and owned by the multinational companies. Before the commodities pass through customs, most of the profits of commodities are already transferred to New York and London through the financial network, consistent with the previous analysis of the processing trade export.
328 From Trade Surplus to the Dispute over the Exchange Rate
Table 10.11: Degree of effect of the Real RMB exchange rate adjustment on the trade surplus of products of different science and technology contents (%).
REX 1 REX 2 REX 5 REX 10 REX 15 REX 20 Low-tech Products
Meat and dairy products
−0.2 −0.4 −1.1 −2.6 −4.5 −6.8 Food processing
industry
−0.1 −0.1 −0.4 −0.8 −1.4 −2.1 Textile −0.2 −0.3 −0.8 −1.6 −2.5 −3.4
Clothing −0.2 −0.4 −1.1 −2.2 −3.3 −4.6
Leather product −0.2 −0.3 −0.8 −1.6 −2.5 −3.4
Wood product −0.3 −0.5 −1.4 −2.8 −4.3 −5.8
High-tech product
Electronic equipment −0.2 −0.3 −0.9 −1.7 −2.6 −3.5 Source: GEMPACK simulation results.