Chapter 10. The Impact of the Exchange Rate
10.2 Effect of the RMB Appreciation on the Import and
The small economy assumption in economics states that if a country accounts for a very small proportion of the product market and of the changes in its domestic interest rate, then the exchange rate policy and inflation will not affect international market prices. Under this assumption, the partial equilibrium can be used to analyze the rela- tions between the exchange rate and import and export. At the begin- ning of the economic reform, China conformed to the small economy assumption. However, over time, it became the world’s second largest economy. According to the World Development Indicators, China’s imports and exports in 2010 accounted for 8.25% and 9.30% of the
310 From Trade Surplus to the Dispute over the Exchange Rate
world’s total imports and exports, respectively. Regardless of per- spective, China is no longer a small economy; therefore, if the price of a product made in China changes relative to its main trading part- ners, then it must be transmitted to all tradable departments through a change in actual purchasing power, thus affecting global trade. For example, the prices of China’s export commodities increase with the RMB appreciation, which affects its exports and causes the orders for this product to be transferred to other countries. The RMB exchange rate adjustment and the import and export changes affect the price system and trade equilibrium to different extents, thus changing the global world pattern. In reality, the variables not only have complex associations in the same economy but also complex games among different economies. If the partial equilibrium analysis framework is adopted, other factors are assumed unchanged when studying the relationship between different variables, and thus the connections within the system are likely ignored, causing serious errors. There- fore, analyzing the different industries and departments and compre- hensively considering the forward and backward correlations of the exchange rate adjustment in the industrial chain will clearly show the effect of the exchange rate adjustment on the entire system.
The RMB exchange rate adjustment affects not only the Sino-U.S.
trade but also trade with other economies. Therefore, the discussion of its effect should not be limited to China and the U.S. but should consider all countries in the world. Only the general equilibrium can clarify discussions on the effect of the RMB exchange rate adjustment on the economy of different countries in the world.
This study adopts GEMPACK software developed by Monash University and establishes the multinational static CGE model that includes China, the U.S., and the main economies in the world based on the GTAP model developed by the U.S. Purdue University. Under the general equilibrium framework, various appreciation schemes of the real RMB exchange rate at 1%, 2%, 5%, 10%, 15%, and 20% are simulated to discuss the effect of different levels of appreciation of the real RMB exchange rate on China’s import and export volumes, dif- ferent departments, science and technology contents, and industries of different labor intensiveness under different trade modes.
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The real exchange rate must be used when studying the effect of the exchange rate adjustment on the imports and exports of different countries. In other words, the price fluctuations of different countries must be considered. If the prices in China increase faster than those in the U.S., even if the nominal exchange rate remains unchanged, China’s real exchange rate will still rise, subsequently weakening the competitiveness of Chinese products. Therefore, the effect is similar to that of the RMB appreciation. Some studies refer to the consumer price index (CPI) when calculating the real exchange rate. As the CPI contains many commodities and services that cannot be traded across the border (e.g., house rent), using the unit element cost is better. The calculation of the unit element cost includes both the price of the inputs and the prices of labor, land, capital, and nat- ural resources to measure the relative competitiveness of different countries more accurately.
The appreciation of the real RMB exchange rate at different levels produces varying degrees of effect on the total imports and exports, as measured by physical output, of major trade countries and regions.
The simulation results follow.
With the rising purchasing power of the RMB, China increases the demand for capital-intensive and resource-intensive products made in developed countries. The result is an increase in the total exports of South Korea, Japan, the U.S., the EU 15 countries, and Brazil (Table 10.2).
The RMB appreciation causes global imports to drop significantly.
The imports of both developed industrialized countries and develop- ing countries will decline. China’s general trade exports will decrease because of the RMB appreciation, thus prompting developing coun- tries to reduce the import of commodities made in China and produce alternatives domestically. Moreover, the RMB appreciation can pro- duce a significant effect on the upstream and downstream enterprises in many countries (Table 10.3).
Trade surplus also changes because of the varying degrees of effect of the RMB appreciation on import and export. The appreciation of China’s real exchange rate by 1% causes the trade surplus to drop slightly by $6.4 billion, accounting for 2.4% of China’s total trade
312 From Trade Surplus to the Dispute over the Exchange Rate
Table 10.2: Effect of the RMB appreciation on real exports (%).
REX 1 REX 2 REX 5 REX 10 REX 15 REX 20 Australia, 0.04 0.08 0.21 0.44 0.68 0.93 New Zealand
Brazil 0.09 0.18 0.46 0.95 1.46 2.02
Canada 0.03 0.06 0.15 0.31 0.47 0.65
China
General Trade −0.66 −1.32 −3.33 −6.79 −10.36 −14.07 Processing Trade −0.14 −0.29 −0.73 −1.51 −2.34 −3.22
EU 12 Countries 0.04 0.07 0.19 0.39 0.60 0.82
EU 15 Countries 0.07 0.15 0.37 0.76 1.18 1.63 Hong Kong 0.02 0.03 0.08 0.16 0.25 0.35
Indonesia 0.03 0.05 0.13 0.26 0.41 0.56
India 0.05 0.10 0.25 0.51 0.80 1.10
Japan 0.08 0.16 0.40 0.82 1.26 1.74
South Korea 0.03 0.07 0.18 0.36 0.56 0.77 Mexico
General Trade 0.09 0.19 0.48 1.00 1.54 2.13 Processing Trade 0.01 0.02 0.06 0.12 0.19 0.26
Malaysia 0.00 0.01 0.02 0.04 0.06 0.09
The Philippines 0.02 0.04 0.10 0.21 0.33 0.46
Central America 0.04 0.08 0.21 0.42 0.66 0.91
EFTA 0.03 0.07 0.16 0.34 0.52 0.72
Other countries 0.03 0.06 0.15 0.31 0.49 0.67
in the World
Russia 0.02 0.04 0.11 0.22 0.34 0.47
Singapore 0.02 0.03 0.09 0.18 0.27 0.37
Other South 0.04 0.08 0.21 0.43 0.67 0.92
Asian Countries
Thailand 0.01 0.03 0.07 0.15 0.23 0.32
Taiwan 0.01 0.02 0.05 0.10 0.15 0.21
The U.S. 0.07 0.14 0.35 0.71 1.11 1.53
Vietnam 0.01 0.01 0.03 0.06 0.09 0.12
Other Southeastern 0.01 0.01 0.03 0.07 0.11 0.15 Countries
South Africa 0.02 0.04 0.11 0.23 0.36 0.50
Notes: REX 1 represents the simulation result when the real RMB exchange rate appre- ciates by 1%, REX 2 represents the simulation result when the real RMB exchange rate appreciates by 2%, and so on, the same as below.
Source: GEMPACK simulation results.
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Table 10.3: Effect of the RMB appreciation on real imports (%).
REX 1 REX 2 REX 5 REX 10 REX 15 REX 20 Australia, New Zealand −0.03 −0.07 −0.18 −0.36 −0.55 −0.75
Brazil −0.06 −0.11 −0.28 −0.58 −0.89 −1.21
Canada −0.02 −0.03 −0.09 −0.17 −0.27 −0.37 China
General Trade 0.34 0.69 1.77 3.71 5.83 8.17 Processing Trade −0.15 −0.31 −0.78 −1.62 −2.50 −3.45 EU 12 Countries −0.01 −0.03 −0.06 −0.13 −0.20 −0.28 EU 15 Countries −0.05 −0.10 −0.24 −0.50 −0.77 −1.05 Hong Kong 0.00 0.01 0.01 0.03 0.05 0.08 Indonesia −0.02 −0.04 −0.10 −0.19 −0.30 −0.40
India −0.03 −0.05 −0.14 −0.28 −0.43 −0.59
Japan −0.04 −0.08 −0.20 −0.40 −0.62 −0.84
South Korea −0.01 −0.03 −0.06 −0.13 −0.20 −0.26
Mexico
General Trade −0.04 −0.08 −0.19 −0.39 −0.60 −0.82 Processing Trade 0.01 0.01 0.04 0.07 0.11 0.15
Malaysia −0.02 −0.03 −0.08 −0.16 −0.24 −0.33
The Philippines −0.01 −0.02 −0.04 −0.09 −0.14 −0.19 Central America −0.02 −0.05 −0.12 −0.25 −0.39 −0.52 EFTA 0.00 0.00 −0.01 −0.02 −0.03 −0.05 Other Countries −0.03 −0.05 −0.13 −0.27 −0.41 −0.55 in the World
Russia −0.02 −0.04 −0.10 −0.21 −0.32 −0.43
Singapore 0.00 0.00 0.00 0.00 0.00 0.00
Other South −0.02 −0.04 −0.10 −0.20 −0.31 −0.43
Asian Countries
Thailand −0.01 −0.02 −0.05 −0.11 −0.17 −0.22
Taiwan 0.00 −0.01 −0.02 −0.04 −0.05 −0.07
The U.S. −0.04 −0.09 −0.23 −0.46 −0.71 −0.98
Vietnam −0.02 −0.04 −0.10 −0.19 −0.30 −0.40 Other Southeastern −0.05 −0.10 −0.26 −0.53 −0.82 −1.12 Countries
South Africa −0.04 −0.08 −0.20 −0.41 −0.62 −0.85 Source: GEMPACK simulation results.
surplus in 2007; an appreciation by 2%, 5%, 10%, 15%, and 20%
causes the trade surplus to drop by 4.7%, 11.9%, 24.5%, 37.9%, and 52.2%, respectively (Table 10.4).
The system is assumed to be in equilibrium when conducting a general equilibrium simulation. However, in real life, the international
314 From Trade Surplus to the Dispute over the Exchange Rate
Table 10.4: Effect of the RMB appreciation on trade surplus (%).
REX 1 REX 2 REX 5 REX 10 REX 15 REX 20 Australia, New Zealand 0.7 1.4 3.6 7.3 11.3 15.6
Brazil 0.6 1.1 2.9 5.9 9.1 12.5
Canada 0.8 1.7 4.3 8.8 13.6 18.7
China
General Trade −3.1 −6.3 −15.9 −32.8 −50.7 −69.8 Processing Trade −0.2 −0.4 −0.9 −1.9 −3.0 −4.1 EU 12 Countries 0.2 0.4 1.1 2.2 3.4 4.7
EU 15 Countries 2.3 4.5 11.5 23.7 36.6 50.4
Hong Kong 0.2 0.5 1.2 2.4 3.8 5.2
Indonesia 0.3 0.5 1.3 2.6 4.1 5.6
India 0.1 0.3 0.7 1.5 2.4 3.3
Japan 0.7 1.4 3.5 7.3 11.2 15.5
South Korea 0.4 0.9 2.3 4.6 7.2 9.9
Mexico
General Trade 0.3 0.7 1.7 3.6 5.5 7.6
Processing Trade 0.0 0.1 0.2 0.4 0.6 0.8
Malaysia 0.1 0.1 0.4 0.8 1.2 1.6
The Philippines 0.4 0.8 2.1 4.4 6.8 9.4
Central America 0.6 1.1 2.9 5.9 9.2 12.6
EFTA 0.6 1.2 2.9 6.0 9.3 12.8
Other Countries 0.2 0.4 1.0 2.1 3.2 4.4 in the World
Russia 0.1 0.3 0.7 1.5 2.4 3.3
Singapore 0.1 0.3 0.7 1.4 2.1 2.9
Other South 0.1 0.2 0.4 0.9 1.3 1.9
Asian Countries
Thailand 0.1 0.3 0.7 1.4 2.2 3.1
Taiwan 0.1 0.1 0.3 0.5 0.8 1.1
The U.S. 0.2 0.4 1.0 2.1 3.2 4.4
Vietnam 0.1 0.1 0.4 0.7 1.1 1.6
Other Southeastern 3.8 7.6 19.2 39.6 61.1 84.0
Countries
South Africa 2.2 4.4 11.2 23.1 35.7 49.1
Source: GEMPACK simulation results.
trade market is not in a theoretical equilibrium state. As the unit labor cost in China is lower than that in countries such as India and Indonesia, where the population is also large, if the moderate scale of exchange rate adjustment does not exceed the gap between the unit labor costs of two countries, then the market shares and the
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job opportunities will not move. The CGE simulation results tend to exaggerate the effect of the RMB exchange rate.