July 17, 2008
Rapid growth in imports of merchandise from the Peoples Republic of China over the past decade has posed a challenge for competing U.S. manufacturers. Some observers believe that the Chinese government has contributed to growth in U.S. imports by maintaining an undervalued currency, and there have been calls for China to revalue its currency, the renminbithat is, to raise its value (or allow it to rise) relative to the dollaras a way to level the playing field for U.S. manufacturers.
In a paper released today, CBO examines two important determinants of how appreciation of the renminbi against the dollar might affect competition in U.S. markets.
The first determinant is the portion of the value of Chinese exports that is produced in Chinathat is, the value of the exports minus the value of the imported inputs (such as parts and raw materials) used to produce them. That portion is often called the domestic value added, or the domestic content. A evaluation of the renminbi would affect the dollar price of only the domestic content of Chinas exports. It would not affect the portion of the exports value attributable to the cost of imported inputsoften called the foreign contentunless the countries that supply those inputs allowed their currencies to rise in value as well.
The second determinant is the degree to which Chinese exports to the United States compete with other countries exports rather than with the products of U.S. manufacturers. In general, a decline in U.S. imports from China would be offset to some extent by an increase (or more rapid growth) in imports from elsewhere.
In brief, CBO finds the following:
- A review of the relevant literature indicates that the average domestic value added of Chinese exports to the United States is probably between 35 percent and 55 percent. As a result, a 20 percent revaluation of the renminbi (for example) would cause the average price of imports from China to rise by roughly 7 percent to 11 percent if Chinese exporters continued to fully pass through their costs and previous rates of profit after the revaluation. The increase would be smaller if the exporters reduced their profit margins to maintain their share of the market, as firms often do when their currencies appreciate. The increase could be larger if the other countries that supply inputs to Chinas exports allowed their own currencies to appreciate in response to the Chinese revaluation.
- By CBOs estimate, roughly one-third of the increase in the share of U.S. imports from China from 1998 through 2005 was offset by reductions in the shares of imports from the rest of the world. However, slight variations in CBOs estimating methodology lead to meaningful differences in the estimate; thus, the actual offset could be somewhat higher or lower. CBOs estimate is considerably lower than the 75 percent to 90 percent reported in two previous studies for periods between 1988 and 1997. The lower value probably reflects, at least in part, a decline in the offset over time as China has developed economically and technologically and its exports have become more similar to the output of U.S. manufacturers and less similar to U.S. imports from elsewhere. The lower value may also stem in part from differences in methodology.