China's Electronics Exports, the Renminbi, and Exchange Rates in Supply Chain Countries

Author Name Willem THORBECKE (Senior Fellow, RIETI)
Research Project East Asian Production Networks, Trade, Exchange Rates, and Global Imbalances
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This Non Technical Summary does not constitute part of the above-captioned Discussion Paper but has been prepared for the purpose of providing a bold outline of the paper, based on findings from the analysis for the paper and focusing primarily on their implications for policy. For details of the analysis, read the captioned Discussion Paper. Views expressed in this Non Technical Summary are solely those of the individual author(s), and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI).

Macroeconomy and Low Birthrate/Aging Population (FY2016-FY2019)
East Asian Production Networks, Trade, Exchange Rates, and Global Imbalances

Acemoglu, Autor, Dorn, Hanson, and Price (2014) reported that import penetration from China after 2001 contributed to "stunning" job losses in U.S. manufacturing. Many others have reported similar findings. The resulting dislocation is feeding protectionism. Che, Lu, Schott, and Tao (2016) reported that counties in the United States that face more competition from China are far likelier to support protectionist politicians. Autor, Dorn, Hanson and Majlesi (2016) found that U.S. Congressional districts that are more exposed to imports from China tended to replace moderate representatives with extreme candidates. In Britain, Colantone and Stanig (2016) found that regions that are exposed to Chinese import competition tended to vote to leave the European Union. Thus, import competition from China is threatening free trade.

In all but one year since 2010, China has had the largest overall merchandise trade surplus in the world. Since 2010, more than 80% of China's merchandise trade surplus has arisen from final electronics goods (FEG) trade. FEG include computers, telecommunications equipment, and consumer electronics goods. Would an appreciation of the renminbi, as many demand, affect China's FEG exports?

The answer is complicated because China's electronics exports contain value added from East Asian supply chain countries. Exchange rates in these countries should thus influence FEG exports. The results in this paper indicate that FEG exports are especially sensitive to exchange rates in South Korea, Taiwan, and other supply chain countries.

Figure 1 shows the Chinese renminbi exchange rate and the weighted exchange rates (wer) in supply chain countries. Since the vast majority of electronic parts and components going to China come from East Asia, the wer reflects exchange rates in the region. Figure 1 shows that, while the renminbi has appreciated by 50% since 2005, weighted exchange rates in supply chain countries have actually depreciated. This depreciation has occurred despite the fact that Taiwan's current account surplus (CAS) has averaged more than 10% of gross domestic product (GDP) since 2009, Korea's CAS has been at least 6% of GDP since 2013, and Singapore's CAS has been at least 17% of GDP since 2009. Japan's CAS, though low in 2013 and 2014, jumped to 2.9% of GDP in 2015.

Cline (2016) has reported fundamental equilibrium exchange rates for East Asian economies and other countries. He found that, as of April 2016, the Taiwanese and Singapore currencies were undervalued by 35% and 40% respectively relative to the U.S. dollar. He also found that China, Japan, Malaysia, the Philippines, South Korea, and Thailand were undervalued by 10% or more with respect to the U.S. dollar. Cline has been reporting these estimates twice a year since 2008, and Chinese and East Asian supply chain currencies have always been undervalued relative to the dollar. Thus, a joint appreciation of regional currencies relative to the U.S. dollar would be appropriate.

This could happen if East Asian countries (including China) adopt regimes characterized by multiple-currency, basket-based reference rates with reasonably wide bands, give greater play to market forces in exchange rate determination, and dialogue extensively about exchange rate policy. The large surpluses that they are running in their current accounts and in regional value chains would then cause their currencies to appreciate together against the U.S. dollar.

A concerted appreciation of East Asian currencies against the U.S. dollar is often hindered because countries compete extensively with each other in the United States and other third markets. Individual countries resist appreciation because they do not want to lose price competitiveness relative to their neighbors. If regional monetary authorities could dialogue extensively with each other about monetary policy and respond together to market forces, they might be able to achieve a joint appreciation and thus not lose price competitiveness relative to each other.

A joint appreciation would also increase consumption imports into East Asian countries. Thorbecke (2011) found that currency appreciations in East Asia would raise the purchasing power of consumers in the region and increase their consumption imports. Thus, concerted appreciations in the region could help to rebalance trade in East Asia and help workers enjoy more of the fruits of their labors.

One final benefit of a concerted appreciation is that it would help to maintain intra-regional exchange rate stability. Kiyota and Urata (2004) reported that exchange rate stability promotes the flow of FDI in the region. Hayakawa and Kimura (2009) found that exchange rate volatility promotes intra-East Asian trade and especially intermediate goods trade within regional production networks. Schnabl and Spantig (2016) reported that exchange rate volatility reduces growth for 10 East Asian countries.

The open world trading system has provided opportunities for East Asian countries to grow and develop. It is now being threatened by intense pressure in the West. China, Japan, South Korea, Taiwan, and other neighbors can forestall this protectionism by allowing their currencies to appreciate together.

Figure 1. Weighted Averages of the Bilateral RMB Exchange Rate and the Exchange Rate in Supply Chain Countries with 20 Importing Countries
Figure 1. Weighted Averages of the Bilateral RMB Exchange Rate and the Exchange Rate in Supply Chain Countries with 20 Importing Countries
Note: These represent weighted average values across the 20 countries used in the empirical work of the real renminbi bilateral exchange rate and the real exchange rate in supply chain countries. The weights are determined by the share of final electronics exports going to each of the 20 countries.
Source: CEPII-CHELEM database and calculations by the author.
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