The Diminishing Impact of Exchange Rates on China’s Exports

China’s merchandise exports increased from $62 billion in 1990 to $3.6 trillion in 2022. In 1990, China’s exports equaled 1.9% of world exports and in 2022 its exports equaled 14.3% of world exports. China’s export juggernaut threatens firms and jobs in importing countries. How does the renminbi affect China’s exports?

Cheung et al. (2012) examined how Chinese aggregate exports deflated using the Hong Kong re-export unit value index responded to the IMF CPI-deflated real effective exchange rate and to export-weighted real GDP over the 1994-2010 period. Employing dynamic ordinary least squares estimation, they reported exchange rate elasticities that are correctly signed and statistically significant. These indicate that if the renminbi were 10% weaker, the long run level of exports would be between 9% and 16% higher.

Exchange rates may not affect China’s exports in recent years as they did during the period that Cheung et al. (2012) investigated. China’s export basket now includes many more advanced products such as machinery, electronics, chemicals, and vehicles than it did over the sample period that Cheung et al. investigated. As more sophisticated goods are harder to produce than simple goods, it is harder to find substitutes for these goods than it is for ubiquitous products. Since finding substitutes is harder, price elasticities should be lower for complex goods.

In addition, Jean et al. (2023) found that China in 2019 possessed a share of more than 50% of worldwide exports in 600 products. This was six times greater than the U.S. or Japan and more than twice as much as the European Union taken as a whole. They noted that when Chinese exporters have a dominant market share in a product, it is difficult for importers to find substitutes. This could cause the price elasticity of demand for goods where China is dominant to be lower.

On the other hand, more of the value-added of the products that China now exports comes from China. Xing (2021) documented the rise of Chinese brands producing cellphones. Branded firms receive more of the return from goods they produce than contract manufacturers do. In addition, McMorrow (2024) showed that much of the value-added going into Huawei’s laptops now comes from China. Ahmed et al. (2016) and de Soyres et al. (2021) presented evidence indicating that the impact of exchange rates on exports increases as more of the value-added of the product is produced within a country.

It is thus an empirical question whether exchange rates have a greater impact on China’s exports in recent years than they did in earlier years. We first investigate this question using time series analysis and data on China’s aggregate exports to the world deflated using Chinese export prices. The results indicate that the exchange rate elasticity over the 1994-2009 period equaled −1.36 and over the 2009-2023 period −0.31. Thus a 10% renminbi appreciation would reduce exports by 13.6% over the earlier sample period and by only 3.1% over the later sample period.

One shortcoming of the time series approach is that we do not control for tariffs. We can do this using the methodology of Bénassy-Quéré et al. (2021). They explained annual disaggregated bilateral exports using a series of fixed effects, the bilateral real exchange rate between exporting and importing countries, the bilateral tariff on a product, and other variables. We employ data on China’s bilateral real exports disaggregated at the Harmonized System four-digit level for 1,242 export categories to 190 countries over the 1995 to 2018 period.

The results over the 1995-2008 period indicate that a 10% renminbi appreciation would reduce exports by 10.3%. The results also indicate that a 10 percent increase in tariffs would reduce exports by 8 percent. The results over the 2009-2018 period indicate that a renminbi appreciation would not affect exports. The results also indicate that a 10 percent increase in tariffs would reduce exports by 6.8 percent.

We also investigate whether exchange rates impacted more sophisticated products differently over the 2009-2018 period, using the method of Hidalgo and Hausmann (2009) to measure sophistication. We find that exchange rates did not impact exports either for simple or for complex products over the later period.

The Chinese renminbi depreciated by 10.5% against the U.S. dollar (USD) between January 2012 and December 2019. As Figure 1 shows, Chinese export prices in USD fell by 7.4% over that period. There was thus significant pass-through from exchange rates to USD prices over this period. Ceteris paribus this should help exchange rates to influence exports over this period. Nevertheless, the evidence indicates that the effect of exchange rates on exports became tenuous after the Global Financial Crisis.

China’s exports have soared. Setser (2024) reported that China’s goods trade balance may be 50% higher than reported in the Chinese current account data. China’s export juggernaut has generated tariffs abroad. Exchange rate appreciations will not help to stabilize exports. Rather than stoking protectionism, to rebalance trade China should boost domestic consumption and countries like the U.S. with outsized budget deficits should pursue fiscal consolidation.

Source: U.S. Bureau of Labor Statistics.