The Effect of Changes in Chinas RMB on the Performance of US Manufacturing

David Kley am! De!artment of Economics& Tam ang University

David "le#ander De $eon Sala%ar 'nstitute of the "mericas Tam ang University

Decem(er )*& )+,,

David Kley am! is "ssociate Professor of Economics at Tam ang University- .e received his PhD in Economics from Te#as "/M University in ,*01- .e has !u(lished !a!ers in the Tam ang 2ournal of 'nternational "ffairs& "rea Studies& and the Economic 2ournal of the Ban of Tai3anDavid "le#ander De $eon Sala%ar is a PhD candidate in the 'nstitute of the "mericas at Tam ang University-

Key3ords4 Chinese 5uan& RMB& Manufacturing& Deindustriali%ation& Productivity

"(stract

Considera(le controversy surrounds the issue of 3hether a revaluation of the Chinese currency 3ould hel! the !erformance of the US manufacturing sector- 't is felt (y some that China6s currency !olicies have (een in !art res!onsi(le for eliminating manufacturing 7o(s in the US& 3hile !lacing do3n3ard !ressure on manufacturing 3ages and out!ut gro3th- This !a!er assesses these claims (y loo ing at macroeconomic data on US manufacturing em!loyment& out!ut& and real com!ensation- 't is found that the Chinese yuan does have a statistically significant effect on em!loyment and out!ut gro3th& (ut these effects are small in magnitude and thus inconse8uential- 't is also found that increases in the value of the Chinese yuan lo3er real hourly com!ensation in US manufacturing (y reducing the !urchasing !o3er of the vast ma7ority of 3or ers 3ho retain their 7o(s- The general conclusion of the !a!er is that US officials 3ould (e (etter advised to see mar et o!ening initiatives& since e#!orts are found to have a consistently stronger effect on manufacturing !erformance than general movements in the RMB-

'- 'ntroduction The secular decline in em!loyment in US manufacturing& cou!led 3ith the stu!endous rise in US trade deficits 3ith China& has made China a !erennial target for certain US officials6 condemnations& 3ith accusations that China is su!!orting its gro3th and e#!ansion at the e#!ense of the "merican manufacturing 3or er- The im!ortation of relatively chea! Chinese manufactured goods& (oth !roducer and consumer items& are held (y these !eo!le to (e res!onsi(le for eliminating high !aying& high valued9added manufacturing 7o(s& along 3ith the acceleration of a general deindustriali%ation of the US and a rising fear among some of long term "merican economic stagnation and decline-

The case of China is !er!le#ing& multifaceted& and 8uite unli e that of 2a!an and Tai3an during the ,*0+s- 'n the !ast& 2a!an6s sur!lus 3ith the US 3as concentrated in a fe3 sectors 3ith 3ell over :+; of its sur!lus <and as high as =+;> due to automo(iles ,Tai3an6s sur!lus 3ith the US 3as li e3ise mainly due to electronics and te#tiles& 3hich the US dealt 3ith through Tai3an6s im!osition of voluntary e#!ort restraints& as 3ell as its self9regulation (y industrial and manufacturing associations& and trade9(ased memoranda of understanding)- By contrast& China6s e#!orts to the US are no3 s!read among a myriad of industries and firms& and these firms do not receive direct aid or overt !rotection from

See Michael S- ?lynn& Sean P- Mc"linden& and David 2- "ndrea& The U.S-Japan Bilateral 1993 Automotive Trade Deficit&<@ffice for the Study of "utomotive Trans!ortation University of Michigan Trans!ortation Research 'nstitute& Se!tem(er ,*0*& !-A0>- To further underscore the !oint (eing made on the concentration of the 2a!anese deficit in autos& 3e !oint out that US President Bill Clinton on 2une ,& ,**A stated that =+; of the US trade deficit 3as due to 2a!anese automo(iles and auto !arts- Clinton made these remar s to farmers and industry grou!s 3hile in Billings Montana as recorded (y the Bhite .ouse Press Secretary& 3hich 3as later !u(lically released- See Public Paper of the Pre ident of the United State & Boo! 1" Januar# 1 to June 3$" 199%" Billiam 2- Clinton& <Cational "rchives and Records& ,**=& !D0A>) &nternational 'ompetivene in (lectronic " <Bashington DC4 US Congress& @ffice of Com!etitive "ssessment& @T"9'SC9)++& Covem(er& ,*01& !- 10=>-

the government- They are small scale& highly agile and innovative& and en7oy su(stantial cost advantages over their foreign rivals- The anonymous and highly dis!ersed nature of such com!etition has forced the US to a(andon any efforts to identify s!ecific Chinese com!anies or grou!s of firms as the cause of its deteriorating manufacturing em!loymentThat 3ould clearly (e infeasi(le- 'nstead& the US government has focused attention on the Chinese government6s (road macroeconomic !olicies and in !articular the !olicy of maintaining 3hat some in the US (elieve is an undervalued renmin(i <hereafter RMB>There have (een 8uite loud and vociferous calls for China to allo3 its RMBEUSD e#change rate to freely float to a level that 3ould (etter reflect mar et fundamentalsThose ma ing such calls !resuma(ly feel that it 3ould ameliorate the trade im(alance and 3ould im!rove US manufacturing !erformance& des!ite the fact that it 3ould also hurt the "merican consumer and reduce ca!ital inflo3-

The Chinese government and its su!!orters in academia have understanda(ly not (een !assive in their reaction to "merican calls for a freeing of the RMB mar et- Control of the RMB is merely thought to (e !art of the larger issue of sovereignty F or !erha!s !art of general monetary and fiscal !olicyG something fe3 3ould claim should (e designed 3ith foreign 3elfare in mind- Beyond this& there have (een serious claims that the RMB is not undervalued or that it is (eing held sta(le relative to a (as et of currencies- 'n still other settings it has (een argued that a rising RMB 3ould not alleviate the im(alances in trade due to lo3 elasticities of demand for such goods& or due to com!etitive !ressures from other countries& or due to a lac of national saving on the !art of "mericans-

This !a!er is concerned 3ith determining 3hether calls for revaluation of the RMB are em!irically 7ustified- That is& (ased on !ast aggregate& time series data& to 3hat e#tent

3ould a stronger RMB& vi -a-vi the USD& result in significant and meaningful increases in US manufacturing em!loyment& out!ut& and real 3ages- There is a strong !resum!tion if mar ets 3or then movements in relative international !rices& as influenced (y

e#change rates& can e8uili(rate the large im(alances seen in (ilateral trade (et3een the US and China- "ccording to this vie3& the value of the RMB should (e im!ortant in rectifying such im(alances in trade- 'f the US has industries that directly com!ete 3ith Chinese firms& a rising RMB 3ill e#!and out!ut& em!loyment and real 3ages- ?or industries that do not com!ete directly 3ith the Chinese& a rising RMB can !rovide Chinese 3ith !urchasing !o3er that e#!ands US e#!orts of goods to China and again 3or s to eliminate the trade deficit-

Co e#!ressly normative argument is made here for freeing u! the RMB- 'nstead& a series of counterfactual& statistical arguments are !resented as ing 3hether a stronger RMB 3ould indeed lead to higher out!ut& em!loyment& and 3ages in US manufacturing-

The structure of the !a!er is as follo3s- Section '' surveys recent research on 3hether the Chinese RMB is currently undervalued relative to the USD- 'n addition& consideration is ta en of studies that have tried to assess the im!act of China6s im!orts on US manufacturing- Section ''' !resents a sim!le theoretical frame3or to guide the

s!ecification of em!irical models to (e tested and clarifies three im!ortant factors that im!act on US manufacturing& including the im!ortation of manufactured goods- Section 'H introduces several em!irical models that are then used to gauge the im!ortance of the RMB on US manufacturing !erformance- Section H concludes the !a!er-

''- " Short Revie3 of the $iterature

The notion of a secular trade9induced decline of US manufacturing has (een around for many decades- 't 3as a !rominent during the ,*D+s and ,*0+s 3hen 2a!an 3as singled out as the ma7or factor in the destruction of US manufacturing 7o(s in steel and automo(iles- During the ,*0+s it 3as asserted that the 2a!anese 3ere com!eting unfairly in steel& automo(iles& electronics& and house a!!liances and 3ere systematically ac8uiring US no39ho3 that 3ould eventually lead to a !ermanently 3ea and enfee(led US manufacturing sector- Even !rominent economists from M'T too a stand in defense of a core of US manufacturing 3hich must (e e!t healthy to serve as a (asis for the real economy-1 Borry a(out this deindustriali%ation (y design 3as !ut on hold (eginning in ,**, 3hen it (ecame clear that the US 3as still the !reeminent national economy in the 3orld and 2a!an (egan its decent into a lost decadeDeindustriali%ation nevertheless continued to (e a to!ic of concern to many economists 3ho attem!ted to categori%e the various causes for the decline in the !ercentage em!loyment in manufacturing- Kollmeyer <)++*> e#!lains deindustriali%ation as a natural !rocess of rising affluence- Thus& a rise in 3ealth leads households to turn to services rather than dura(les& causing that sector of the economy to increase and thus lo3er em!loyment in the manufacturing sector- Ro3thorn and Coutts <)++:> !rovide a clear set of reasons for the deindustriali%ation seen in develo!ing countries including domestic outsourcing of servicesG changes in consum!tion !atterns <3ith falling relative !rices leading to smaller shares of manufactures in IDP>G gro3th of !roductivity in manufacturingG trade dis!lacementsG and changes in the !ercentage of investment in IDP - Their argument on !roductivity gro3th is illuminating since it states that manufacturing !roductivity gro3th is higher than that of services and therefore services re8uire more la(or over time to maintain out!ut levels- This reduces la(or used in
See Michael $- Dertou%os& Richard K- $ester& and Ro(ert Solo3& )ade in America* +e,ainin, the Productive (d,e& <The M'T Press& Cam(ridge& M"- ,*0*& !-:>1

manufacturing as a !ercentage of the 3hole- Ro3thorn <,**:> has em!hasi%ed the role of !roductivity as the main driver of deindustriali%ation- .e finds less evidence that manufacturing !erformance declines in res!onse to trade 3ith develo!ing countriesMontesor and Mar%etti <)+,,> !rovide evidence that deindustriali%ation is not sim!ly an Ja!!eared !henomenonJ 3here an outsourcing of services to firms outside of manufacturing <(oth domestic and foreign> reduces manufacturing em!loyment and increases service em!loyment- Rich <)+,+> agrees that trade is not clearly causing a destruction of 7o(s in manufacturing& (ut outsourcing may (e !artly res!onsi(le- Cic ell& Redding& and S3affield <)++0> do not a!!ear to give much em!hasis to trade in e#!laining deindustriali%ation of develo!ed countries- ?or them deindustriali%ation is not 3ell understood 3ith com!licated dynamics& caused in !art (y em!loyment !rotection !olicies- @verall& these authors stress that much of deindustriali%ation is due to !roductivity gro3th& changes in relative !rices& and changes in education-

Des!ite the fact that many of these authors do not find trade to (e the main cause of deindustriali%ation& controversy again arose at the start of the ),st century 3ith the stu!endous rise in China6s economy and the concomitant rise in US (ilateral trade deficits 3ith the PRC- "s these trade deficits 3idened and US manufacturing em!loyment continued to fall in large num(ers& es!ecially after )++,& there 3ere rene3ed calls for action against 3hat 3as seen as !redatory Chinese !ractices against US manufacturing (usiness F in !articular& currency mani!ulation- Chan <)+,+> has re!orted that the 'M? has (een fee(le in res!onding to currency issues that are needed to correct im(alances (et3een sur!lus countries <China and Iermany> and deficit countries <US and UK>China has li e3ise attem!ted to defuse tensions over the RMB (y using a slo3 a!!reciation- US Treasury Ieithner is characteri%ed (y Chan as (elieving that China is

!ur!osely (loc ing an a!!reciation of the RMB- This vie3 has (ecome common!lace among many o(servers in the US that the Chinese are strategically (oosting their mar et share in the US (y ee!ing the value of the USD high relative to the RMB-

'n fact& China has (ecome a manufacturing hu( for many "sian nations 3ho feed im!orts into China& !rocess them using chea! la(or& and then e#!ort these on to develo!ed countries such as the US and Euro!e- @ver the !ast decade& large collective current account sur!luses that countries such as South Korea& Tai3an& and 2a!an had e#!erienced 3ith the US 3ere (rought together very !rominently and channeled through ChinaK ma ing China an easy target for "merican animosity and controversyThe US

government has (ecome more and more aggressive a(out dealing 3ith 3hat it !erceives as a Chinese mani!ulation of its currency- ?ran el and Bei <)++D> have studied the (ehavior of the US Treasury in naming currency mani!ulators and have found that the Treasury is motivated in !art out of large trade deficits 3ith those countries namedCevertheless& .ale and .ale <)++0> ta e the !osition that revaluation is the 3rong a!!roach to ta e 3ith the Chinese arguing that )D; of Chinese e#!orts are ultimately generated (y US cor!orations <through @EM and the li e>G that China6s sur!lus is (alanced (y a regional deficitsG that currency a!!reciation 3ould ma e im!orts chea!er and may lead to greater e#!ortsG and that internal reforms are more im!ortant than currency realignments- .o3ever& Morrison <)+,+> !rovides a com!lete discussion of US9 China trade dis!utes and lists Congressional legislation !ro!osed to force China to revalue its currency F including !arts of such (ills as S- ,A0=& .R )1D0& S- ,+)D& S- ,)A:& and S1,1:- "s an aside& 2ohnson <)++*> !rovides a rather !eculiar testimony (efore a Congressional committee dealing 3ith the im!act of Chinese trade on US manufacturing since a(solutely no mention is made of China or trade at all-

The controversy& in (oth !rivate and governmental circles that has arisen& has led to an out!ouring of research on the RMB6s effect on the US economy and the level of the RMB that 3ould most li ely eliminate the (ilateral trade deficit 3ith the US-

Baugh and 5ud en <)++=> assert that trade is costing "merican 7o(s 3ithout !roviding much evidence- They then use this as a (asis to advocate !ro9union changes to US economic !olicy and an e#tension of la(or rights to countries such as China- They are !articularly 3orried that even large high9tech manufacturing 3or s& such as the !roduction of the Boeing D0D 3ill eventually (e largely farmed out to Chinese 3or ers& something that seems highly unli ely- Bernard <)++*> highlights the negative effects that trade has had on Canadian manufacturing 7o(s- U! to one in seven 7o(s 3ere lost during the !eriod )++: F )++0- Te#tiles and clothing have (een !articularly hard hit- There has also (een a large and im!ortant migration of manufacturing firms from Canada to ChinaThe Canadian e#!erience has a direct (earing on the fate of US manufacturing firms due to their !ro#imity and similarity in 3age levels& etc- Ed3ards and $a3rence <)+,+> found that Chinese manufactured have resulted in lo3er manufacturing !rices& (ut this has not caused greater 3age ine8uality as 3ould (e e#!ected if factor !rice e8uali%ation 3as at 3or - They claim this indicates that Chinese and US manufactured goods may (e 8uite different and therefore do not su(stitute 3ell 3ith each other- ?air <)+,+> em!loyed a multi9country econometric model to determine the effect of a rise in the value of the RMB on (oth the US and Chinese economy- .e finds that US out!ut and em!loyment rise& (ut the effects are modest in si%e- Iris3old <,***> ma es a strong case for free and o!en trade& asserting that in ,**: only ,); of "merican manufacturing 3or ers 3ere in industries that 3ere e#!osed to im!orts totaling 1+; or more of total out!ut in that

industry- The vast ma7ority of 3or ers in the US are em!loyed in sectors that are only marginally involved in trade- These 3or ers (enefit most from lo3 !riced !roducts from China and 3ould (e hurt (y an increase in the RMB- 5u <)+,+>& on the other hand& em!loyed a large scale gravity model to sho3 that a rise in the RMB 3ould have a su(stantial effect on Chinese e#!ort to the US- The study ho3ever has several une#!ected results& including the fact that 3hen fi#ed effects are introduced& US IDP a!!ears to have no statistically significant effect on US im!orts from China- 'n addition& there does not a!!ear to (e any discussion of ho3 a rising RMB 3ould im!act on US e#!orts to China& 3hich might (e thought to (e even more im!ortant in hel!ing to (alance trade and raise US manufacturing em!loyment-

Des!ite a divergence of o!inion regarding ho3 much influence the RMB e#erts on US manufacturing& there has (een considera(le interest in trying to estimate the level of RMB that 3ould generate a current account (alance for China& and in !articular the level that 3ould eliminate the large (ilateral trade sur!lus 3ith the US- Since trade (et3een China and the US is dominated (y manufactures& it is thought that re(alancing 3ould have a !ositive effect on US manufacturing !erformance-

Bergsten <)+,+a> and Bergsten <)+,+(> sees the RMB as )+; undervalued and has (een vociferously advocating the a!!lication of !ressure on the Chinese government to raise the RMB 09,+; !er year- Cheung& Chinn and ?u7ii <)+,+> have !rovided a large survey of estimates ranging from a high of A+9=D; to a lo3 of +9,);- Cline <)+,+> feels that a regional a!!reciation of currencies 3ould (e more effective at reducing China6s current account sur!lus 3ith the US 3ith a ,+; revaluation in the RMB resulting in a lo3 of L)) (illion reduction in the sur!lus to a high of L =1 (illion- Thor(ec e <)+,+> also (elieves

that the structure of China6s trade& 3ith )E16s of im!orts coming from East "sia to (e !rocessed for e#!ort& re8uires a (road& regional a!!reciation in order to see a (alancing of its current account- Ioldstein and $ardy <)++=> estimate that the RMB 3as )+9:+; undervalued during )++A and made a !rominent call for an immediate revaluation of ,+; in the value of the RMB relative to the USD- By contrast& Min and .e <)+,+> more recently use time series data and find that China6s real e#change rate <calculated (y using the ratio of CP' figures> is not at all undervalued- Tyers and Nhang < )+,,> ma e the case that the Belassa9Samuelson frame3or is ina!!lica(le in 7udging the valuation of the RMB during the ,**D F )++: !eriod due to e#cessive saving and ca!ital outflo3 on the !art of ChinaMa and McCauley <)+,,> have commented on the desira(ility of a

common a!!reciation of the RMB among the ma7or trading countries of "sia as a form of regional monetary coo!eration- McKinnon <)++=> has remained adamant in su!!orting a continued fi#ing of the RMB to the USD since an a!!reciation that is foreseen could create a li8uidity tra! that 3ould render China6s monetary !olicy ineffective- Morrison and $a(onte <)+,+> ta e a very conventional vie3 of the RMB noting that an a!!reciation 3ould li ely reduce China6s (ilateral sur!lus 3ith the US& (ut should only (e done in concert 3ith domestic structural changes that 3ould stimulate domestic consum!tion and offer em!loyment to dis!laced 3or ers and manufacturing out!ut- They also reali%e that the US is !artly res!onsi(le for the (ilateral deficit through its continued lac of national saving- Sato& Shim%u& and Nhang <)+,+> use a su!!ly side frame3or to estimate the e8uili(rium RMB9USD e#change rate for China and find that it is considera(ly undervalued and should rise (y =A; from its )+++ level- This estimate agrees 3ith the largest of estimates 3ithin the literature on the undervaluation of the RMB- Su(ramanian <)+,+> a!!lies the PPP frame3or and finds strong evidence of a 1+; undervaluation of the RMB& (ut there is much to (e desired in using the PPP method& 3hich is no3n to

suffer a great many faults- Bhalley and Bang <)+,,> use a com!uta(le general e8uili(rium model to analy%e the effect of a reevaluation of the RMB on trade flo3s and trade sur!lus- They find a strong effect of revaluation on (oth& (ut !articularly on the sur!lus- .o3ever& their results de!end crucially on the degree of su(stituta(ility of domestic !roduction for foreign !roduction in consumer demand- This is !recisely the !ro(lemG vi%- it is difficult to assess ho3 much US consumers 3ould react to higher !rices on Chinese goods and 3hether US !roduction is a close su(stitute- Oing <)+,+> has found very little effect of an RMB revaluation on the (ilateral trade (alance- Econometrically& it is difficult to determine the effect of an a!!reciation on trade since !ast a!!reciation has (een slo3& !redicta(le& and minute-

'''- Some Theoretical Considerations

There e#ist a set of traditional 3ays to a!!roach the issue of measuring the effect of a currency a!!reciation <i-e- the RMB> on a foreign industry <i-e- US manufacturing>- @ne a!!roach 3ould model the microeconomic o(7ectives and constraints and then e#!licitly derive the e#!ected effects of an a!!reciation as a (y9!roduct of the o!timi%ation !rocess.o3ever& this a!!roach assumes that there is high fre8uency data at a detailed microeconomic level F something that is unli ely to e#ist for the case of China- The analysis is also invaria(ly !artial e8uili(rium in !ractice since the microeconomic as!ects of the model cannot (e easily e#tended to other levels of economy and other countries& many of 3hich are also involved in trade 3ith the industry (oth domestically and internationally- This !laces limits on the idea that a feasi(le model can (e (uilt u! from rational ma#imi%ing (ehavior at the individual firm level- "n additional !ro(lem is that the re!resentative firm is so generic that it often fails to ca!ture any of the im!ortant

features of real life firms& such as aggregation constraints& ris and uncertainty& !roduct 8ualities& name (rands& regulation& mar eting costs& trans!ortation and insurance& strategic !lanning& and many other attri(utes that remain comforta(ly under the surface at a macroeconomic level

"n alternative a!!roach 3ould a(andon the fiction of a sta(le& generic re!resentative firm& 3hich is involved in ma#imi%ing !rofits& in favor of an aggregate model that is (uilt from no3n macroeconomic e8uili(rium relations or identities- There are many e#am!les of this in macroeconomics& such as the familiar e8uation of e#change from monetary theoryG the Keynesian cross from macroeconomicsG (alance of !ayments models from international financeG and Iordon6s stoc 9(ond ar(itrage e8uation from stoc valuation theory- 'n each case& a 3ell no3n& generally acce!ted identity& definition& or ar(itrage relation is chosen- Then& actual and de ired 8uantities are distinguished F 3ith actual 8uantities coming from the identity or definition and de ired 8uantities coming from fle#i(le theoretical considerations- 'n some cases& an e#!licit o!timi%ation model can (e used to derive the desired 8uantities and at other times& 3hen the sheer num(er of varia(les in !lay (ecomes im!ossi(le to handle 3ithin a single o!timi%ation model& these varia(les can (e entered in a general 3ay into the model- "ll that is needed is an intuitive !ath (et3een the data and the desired varia(le in the identity-

Be ado!t the second ty!e of methodology s!o en of a(ove and (egin (y 3riting the definition of average la(or !roductivity as

(.

<,>

3here y P average la(or !roductivity& 5 P real manufacturing out!ut& E P total la(or em!loyed in !roducing 5 and measured in terms of !ersons& and . P average hours !er em!loyee over the o(servation !eriod- Ta ing natural logs and solving this for E in terms of the other varia(les results in

ln/ ( 0 ln/- 0 ln/ # 0 ln/ . 0

<)>

Be ne#t (reathe life into this accounting relation (y assuming that the desired& as o!!osed to actual& hours . can (e 3ritten as

. = Ao- # ( e 1 2 e

<1>

6 O is a linear com(ination of other varia(les that affect .- The last varia(le 3here

is a random varia(le re!resenting all other minor forces that have not (een s!ecified-

Su(stituting this . function into <)> a(ove yields ln/ ( 0 = ln/- 0 ln/ # 0 ln/ Ao- # ( e 1 2 e 0 = ln/ Ao 0 + / , 0ln/- 0 / , 0ln/ # 0 + ln/ ( 0 + 1 2 + Solving this last e8uation for ln/ ( 0 3e can 3rite the regression model as <:>

ln/ ( 0 = o + , ln/ - 0 + ) ln/ # 0 + 1 2 +

<A>

't should (e noted that this regression e8uation suffers from the same !ro(lem all highly aggregated e8uili(rium econometric models have F namely simultaneous e8uations (ias-:

"n e#am!le of this is single e8uation estimation of real money demand that ty!ically treats real income and the interest rate as e#ogenous and inde!endent relative to the regression error term& des!ite the fact that that these are in fact endogenous in larger economic models of the economy:

Ce#t& consider the issue of real com!ensation to la(or in manufacturing- ?or manufacturing firms& there is at least some rough evidence that la(or cost as a !ercentage of total cost 3ill normally (e (et3een :A9=+;& not only for the US& (ut among a 3ide variety of countries"ssuming the variation in the desired form of this ratio for the US is relatively small over the !eriod of o(servation& and that it res!onds to a !articular set of varia(les& 3e can 3rite

S3 =

4 4 4(. P = P = P-/ , 0 # (.

<=>

3here

P total nominal com!ensation to la(or& P P !rice of out!ut& and

P P

ratio of total cost to total revenue- "s (efore& distinguishing (et3een actual and desired 8uantities& the relation in <=> can (e transformed into a regression as

ln/

4 0 = o + , ln/ # 0 + 1 2 + P

<D>

3here 1 2 re!resents a linear com(ination of other varia(les 3hich might im!act on the real com!ensation of la(or?inally& manufacturing out!ut can (e analy%ed (y again starting 3ith an identity - -d + 2p )p

<0>

3here

P domestic demand for manufacturing <including changes in inventories>&

the e#!orts of manufactures& and

P the im!ort of manufactures- E8uation <0> is of

!aramount im!ortance in the controversy over 3hether Chinese im!orts are in fact dis!lacing "merican domestic manufacturing out!ut- 't also sho3s ho3 that e#!orts can (e im!ortant in offsetting any dis!lacement that may (e occurring due to such im!ortsBeyond this& there is a structural issue concerning 3hether or not the US !u(lic is s!ending more as a !ercentage of its of its dis!osa(le income on services and less on manufactured goods- " country6s economy as it matures 3ill naturally e#!erience a ra!idly e#!anding service sector over timeBe can re3rite <0> as 65 -d -d - / , + d 0/ 07DP = / , + 0/ 07DP 7DP 7DP

<*>

3here

P net e#!orts of manufactured goods and 3here

is again a desired

8uantity de!ending numerous varia(les& O& including the e#change rate and IDPTa ing logs of (oth sides and su(stituting desired for actual 8uantities allo3s us to 3rite the regression e8uation for manufacturing out!ut 5 as ln/ - 0 = o + , ln/ 7DP 0 + 1 2 + <,+>

3here

is a linear com(ination of other varia(les that are e#!ected to im!act on 5

through t3o of the three channels found on the right hand side of <*>-

'H- Estimation and Results The (asic regressions that have (een develo!ed in the !revious section& to assess the im!ortance of changes in the value of the RMB on US manufacturing em!loyment& real com!ensation& and out!ut& are sho3n in e8uations <A>& <D>& and <,+>& res!ectively- The im!licit assum!tion (eing made a(out these e8uations is that they are sta(le over time& meaning the !o!ulation !arameters are relatively unchanged& as are the structural relations- .o3ever& cointegration tests 3ere run on the e8uations and it 3as found that none of the e8uations dis!layed sufficient sta(ility to 3arrant use of standard cointegration and error correction analysis- 'nstead& the varia(les 3ere differenced <eliminating any !otential unit root !ro(lems> and autoregressive models 3ere then fit to these differenced varia(les-A The result 3as a relatively tight fit 3ith strong !arameter sta(ility- Because of the !ossi(le !resence of autocorrelation and heteros edasticity& (oth unad7usted and ."C9ad7usted t9tests are !rovided in the ta(les for com!arison-

Data is readily availa(le from the Bureau of $a(or Statistics& the St- $ouis ?ederal Reserve data(an ?RED& and from Cational Bureau of Statistics of China <3hich

ultimately !rovides CP' data on China>- "ll monthly data have (een converted to 8uarterly averages- Monthly data e#ists for many of the varia(les& (ut higher fre8uency data are not availa(le for IDP- 'n addition& higher fre8uency data re8uires considera(le so!histication in modeling the dynamics& seasonality& and lags in effect- By contrast& the effect of e#change rate movements is less (urdened (y dynamic considerations 3hen 8uarterly data are used- The term RMB refers to the num(er of Chinese yuan <CC5> that

This is a standard fall(ac 3henever cointegration fails <see .ill et- al- <)++0> !!- 1:+91:,>- The failure to find statistically significant cointegration does not !reclude a sta(le regression e#isting in differenced varia(les- The regressions are run 3ithout error correction terms <in levels>- 't does mean that there is no a!!arent long run relation (et3een the time series in levels- The lac of cointegration is !ro(a(ly due to the fact that there are so fe3 o(servations (eing used over a !eriod 3hen the economy is undergoing considera(le structural change F something to 3hich the differenced varia(les can nevertheless ada!tA

e#change for one USD=- Thus& a rise in the RMB e#change rate is in fact a rise in the value of the USD& as 3e have defined things- 't 3ill (e useful to ee! in mind that the Chinese foreign e#change rate discussed in the !a!er is merely the value of the USD in terms of the Chinese yuan-

To ease the e#!osition of results& the relevant regressions have (een !laced into grou!s for com!arison- Ta(les ,9"& ,9B& ,9C and ,9D <hereafter Irou! Ta(les ,> are concerned 3ith the s!ecification of manufacturing em!loyment& as in e8uation <A> a(ove- Irou! Ta(les ) and 1 are similarly concerned 3ith real manufacturing com!ensation <3ages !lus (enefits> and manufacturing out!ut& res!ectively- Be note that the construction of an accurate real e#change rate is !ro(lematic& due to lac of com!rehensive data on trada(le goods and services for (oth countries- "s a result& ta(les " and B of each of the Irou! Ta(les use nominal values for !ur!oses of com!arison- ?or the !eriod& ,**:9)+,+ relative CP' inde#es are used to construct a functional real e#change rate& (ut it should (e noted that this data is !ro(a(ly contaminated 3ith heavy measurement error& not to mention the fact that it s!uriously includes numerous non9trada(le goods and services- 'ndeed& it is argued in this !a!er that most Chinese consumers are una(le to !urchase the ma7ority of "merican goods& ma ing the notion of PPP rather 8uaint in this conte#t F des!ite the fact that much controversy surrounds the movement in such real rates- Haria(les 3ere log9 differenced 3hen such differencing seemed natural- Cumerous regressions and s!ecifications 3ere run and a !ortion of these are sho3n in ta(les (elo3- @ut of this large set of regressions a num(er of recurring features and styli%ed facts 3ere o(served& some of 3hich 3ere statistically significant according to Ceyman9Pearson testing and others 3hich 3ere not statistically significant& (ut nevertheless interesting in signs and

The RMB is the formal name of the Chinese currency& 3hile the Chinese yuan refers to the units 3hich the RMB is denominated- This is some3hat li e calling the USD the Jgreen(ac J and saying it is denominated in dollars=

magnitudes-

< i > Em!loyment Results

Regressions !resented in Irou! Ta(les , sho3 the effects of several varia(les on the gro3th in US manufacturing em!loyment- Cote that the de!endent varia(le refers to the num(er of em!loyees in manufacturing and not to em!loyee hours or the !ercentage of total em!loyment in manufacturing& The most im!ortant results that are im!lied (y these ta(les are as follo3s F

Em!loyment gro3th a!!ears to (e most consistently sensitive to out!ut <Q> and !roductivity <9> gro3th- The signs are as e#!ected and are certainly statistically significant- These t3o varia(les regressed alone account for 0,; of the variation in em!loyment- The remaining variation is due entirely to changes in average 3or hours and to measurement errors- Thus& if average 3or ing hours 3ere constant and there 3ere no measurement errors to s!ea of& the regression 3ould revert to a deterministic identity and the R) 3ould (e ,- The regressions in Irou! Ta(le , therefore assume that there e#ist varia(les that affect the desired average num(er of 3or ing hours& 3hich in turn varies over time- Both gro3th in out!ut and !roductivity have strong effects- ?or e#am!le& a dou(ling of the gro3th in industrial !roduction 3ould add half that amount to em!loyment gro3th <3hich is close to the @ un6s coefficient for the US>

The (usiness cycle indicator varia(le does not a!!ear to have a significant effect on the gro3th in manufacturing em!loyment& inde!endent of the out!ut gro3th and !roductivity gro3th factors mentioned a(ove- This might indicate that& aside from direct movements in out!ut& the (usiness cycle does not affect em!loyment through a strong e#!ectations or

confidence effect- @ne im!ortant difficulty encountered 3ith this varia(le is that& for most regressions& the !eriod of o(servation is ,**: F )+,+ and therefore there are only t3o recessions that a!!ear in the data over this o(servational !eriod-

Changes in the com!osition of consum!tion& as re!resented (y movements in the !ercentage of consum!tion devoted to dura(les& does not have a statistically significant effect on the gro3th in manufacturing em!loyment- Part of this may have to due 3ith the fact that a rising dura(le mar et gives rise to a strong service sector designed to service the dura(le F for e#am!le& autos& cell !hones& com!uters& etc- Services to dura(les& 3hich may (e outsourced& may rise faster than the dura(le mar et and cause a reduction of em!loyment in the dura(le manufacturing sector- 'n any event& this varia(le does not generally (ear a strong relation to movement to any of the three varia(les 3e are consideringG namely em!loyment& real com!ensation& or out!ut- Much has (een made in the literature a(out the rise of the service sector and ho3 this may adversely im!act on the manufacturing sector& (ut this is hard to se!arate out from the other factors involved& such as out!ut-

The value of the USD relative to the RMB is a statistically significant varia(le in determining the value of manufacturing gro3th& (ut only 3hen e#!orts are e#cluded from the e8uation- Regressions 3ith (oth varia(les included have (een omitted for (revity- 'f e#!orts are included in the e8uation& the value of the dollar ceases to (e significant- @ne !ossi(le reason for this is that the effect of changes in the RMB9USD e#change rate seems to (e centered on e#!orts and not on im!orts- The value of the USD continues to have a negative coefficient& (ut it is not longer significant 3hen used in con7unction 3ith total real e#!orts- That is& a rise in the US dollar reduces em!loyment in US manufacturing

!rinci!ally (y reducing e#!orts of US firms to China- 'f (oth im!orts and e#!orts 3ere se!arately im!acted& 3e 3ould e#!ect to see (oth the value of the dollar and e#!orts remain significant varia(les 3hen (oth e#!lanatory varia(le are !resent- This is not the case- This result is im!ortant since it says that concerns a(out Chinese im!orts are some3hat mis!lacedConcern should (e instead focused on the e#tent to 3hich

movements in the RMB could induce greater e#!orts to China F something 3hich 3ould go a long 3ay in reducing the trade im(alance that is giving rise to controversy-

"nother interesting as!ect of this result is that it does not matter 3hether one uses the nominal e#change rate or the real e#change rate& the effect remains negative- That is& a faster rise in the value of the RMB tends to increase US manufacturing em!loyment gro3th- .o3ever& the si%e of this effect is not !articularly large- @ne reason 3hy that the effect seems muted is that if the rise in the RMB is su(dued& trended& and therefore 3ell e#!ected& then it 3ill li ely have little effect on China6s e#!orts to the US and im!orts from the US- This is analogous to the testing of the effectiveness of a ne3 drug& 3here the drug is administered in e8ual and highly controlled amounts& (ut nevertheless in doses that are much too small to ma e a difference- @(servations 3ill sho3 that the drug is hardly effective at all& and in some cases 3e may find that !atients 3orsen under the treatment-D "nti(iotics given in e5ce ivel# mall amounts may (e totally ineffective in curing a !atient and can in some cases ma e the situation 3orse- This is not to say that the RMB must go through a si%ea(le revaluation sim!ly to satisfy our curiosity- But& it does !oint to the inherent difficulties in econometrically assessing the effectiveness of the RMB 3hen changes in the RMB are so small'n fairness it should (e mentioned that !atients often die from overdoses of an other3ise !erfectly harmless drug- This is of course the danger of em!loying analogies in scientific arguments- But the alternative is of course to use statistics& and this 3as the original !ur!ose of the analogy F to e#!lain 3hy 3e find a a small (ut nevertheless statistically significant effect- @ne can never really no3 the true effect of a varia(le in a regression if its varia(ility is too small relative to the varia(ility of the other factors affecting the de!endent varia(leD

The short run elasticity <at means> for changes in the value of the USD relative to the RMB is incredi(ly small& even 3hen 3e find a statistically significant effect- " dou(ling of the gro3th rate in the value of the RMB <3hich 3ould (e ta ing it from roughly )-A; !er year to A; !er year> 3ould add a(out ,= (asis !oints of additional gro3th in US manufacturing em!loyment <i-e- 9)-A; multi!lied to 9+-++=) from Ta(le ,9" column :> This 3ould (e li e ta ing the rough average decline in US manufacturing em!loyment of 91-,=; !er year and ma ing it 91-+; !er annum insteadG a !ositive develo!ment& (ut inconse8uential in !ractical terms- Thus& the vie3 that a revaluation of the RMB might hel! (ring a(out a radical change in em!loyment in US manufacturing is 3ithout any (asis& if this research is valid- By contrast& real e#!orts have a much stronger short run effect on manufacturing em!loyment gro3th& as seen in Ta(le ,9B- The effect is roughly four times as large as the effect of an RMB a!!reciation- 'ncreasing US e#!orts to China could have a much stronger effect on em!loyment gro3th-

These elasticities assume that all other factors remain constant during the !eriod- The u!shot of this is that the US should not focus attention on a controversial revaluation of the RMB& (ut should instead consider more congenial ste!s of mar et o!ening that 3ould allo3 more Chinese to en7oy US manufactured goods& !rovided the !olicy goal is to create more US manufacturing 7o(s-

< ii > Real Com!ensation of $a(or

Irou! Ta(le ) deals 3ith the real com!ensation of la(or in US manufacturing- The de!endent varia(le in all three regressions is the gro3th rate of real com!ensation&

including (oth 3ages and (enefits- Unli e the other e8uations& the e8uation for real com!ensation has a much lo3er R) statistic& indicating that there are many idiosyncratic factors at 3or 3or ersin determining the gro3th of real com!ensation for manufacturing

"mong the factors considered in Irou! Ta(le )& the most im!ortant varia(les (y far are again !roductivity and out!ut gro3th& as one might e#!ect- Regressions on these t3o varia(les alone result in an R) of +-,*& 3ith the signs on (oth !roductivity <Q> and out!ut gro3th <9> (oth as e#!ected- The second of these is related to a larger macroeconomic issue of countercyclical 3ages- Iiven the gro3th of !roductivity for la(or& higher out!ut is e#!ected to (e associated 3ith lo3er real 3ages- This 3as !redicted (y Keynes in ,*1= and his !rediction su(se8uently (ecame the focus of an intense de(ate and controversy@ur regressions in Irou! Ta(le ) confirm Keynes6 !rediction of the countercyclical nature of real 3ages-

The value of the USD in terms of the RMB is estimated to have a !ositive relation 3ith the gro3th of real com!ensation- This might seem counter9intuitive& (ut a higher USD means that 3ages earned (y em!loyees (uys more& es!ecially if there are many goods (eing im!orted at lo3er e#change9ad7usted !rices from China- Caturally& there is the issue of factor !rice e8uali%ation 3hich 3ould normally o!erate to reduce 3ages to (e more in line 3ith 3ages in China- .o3ever& lo3 !riced im!orts from China ma e the real value of US manufacturing 3ages higher than they 3ould (e other3ise- This result is very im!ortant as it sho3s that many 3or ers in manufacturing 3ould in fact (e hurt (y a US dollar that 3ea ens- $oo ed at in this 3ay& millions of 3or ers in manufacturing 3ould ee! their 7o(s& even in the face of a stronger US dollar- Moreover& these 3or ers 3ill

e#!erience a rising avera,e real 3age as the dollar strengthens due to an increase in the !urchasing !o3er of their nominal 3age- That is& 3ith some 3or ers losing their 7o(s on the margin and overall em!loyment (eing hurt& the vast (ul of em!loyees in US

manufacturing 3ill gain from the higher !urchasing !o3er of their 3age- This argument is similar to the effect of a rise in the minimum 3age- There is no dou(t that a rising minimum 3age causes unem!loyment on the margin& (ut for the much greater set of 3or ers 3ho retain their 7o( after the 3age hi e& they e#!erience a higher real 3age and therefore (enefit-

<iii> Manufacturing @ut!ut

Bith res!ect to gro3th in manufacturing& the gro3th in US real IDP has an e#!ectedly !rofound effect& as sho3n in Irou! Ta(le 1- This is due to the increase in demand for manufactures& (oth !roducer and consumer goods& that occurs 3hen real IDP rises- @ver =+; of the variation in in the gro3th of manufacturing out!ut can (e e#!lained (y this single varia(le- "ddition of other e#!lanatory varia(les raises this an additional ,A; of the variation in out!ut gro3th- The real value of the USD in terms of the RMB has the e#!ected sign and an elasticity <at means> of a(out +-,+& 3hich is very lo3 (ut considera(ly larger than the similar elasticity for em!loyment gro3th- " 3ea er USD F stronger RMB leads to a gro3th in US manufacturing out!ut- "gain& 3e find that if real gro3th in US e#!orts is added to the e8uation& the elasticity on the real value of the dollar dro!s (y ,E1 and the coefficient (ecomes statistically insignificant- 'nterestingly& if 3e (egin 3ith the unadorned (asic regression using only the gro3th in real IDP and then add in the gro3th in the value of the dollar& the R) rises a(out A; and the USD9RMB varia(le is statistically significant- "dding real e#!orts then increases R ) (y another A; (ut the

coefficient on the value of the USD9RMB dro!s (y ,E1 and (ecomes insignificant- This a!!ears to (e evidence of a se!arate and 3ea effect of the RMB on manufacturing out!ut gro3th& (ut still e#!ort gro3th dominates- @ne reason for this is !ro(a(ly that e#!ort gro3th has much greater variation than does movements in the USD9RMB e#change rateThis allo3s its effect to (e estimated more !recisely- 5et another !ro(lem is that the Chinese government may see to defuse trade animosities (et3een itself and Bashington (y (oth slo3ly a!!reciating the RMB 3hile at the same time increasing !urchases <e-ggovernment !rocurements& etc-> of US e#!orts- 'f this is true& then it may (e difficult se!arating the effect of a rising RMB from a rising 8uantity of im!orts from the US- Both 3ill (e occurring during the !eriod of ad7ustment and (oth 3ill have an effect on US manufacturing out!ut gro3thH- Conclusions The a!!ro!riate value of the RMB has (ecome a focal !oint of controversy (et3een the US and China- Many o(servers in the US claim that China is continuing to !rotect its manufacturing (ase and e#!and it current account sur!lus (y artificially ee!ing the value of the RMB lo3 relative to the US dollar- They assert that a su(stantial revaluation of the RMB 3ould hel! to reduce China6s (ilateral trade sur!lus 3ith the US and this 3ould foster higher out!ut& em!loyment and real 3ages in the US manufacturing sector- The common vie3 among these researchers is that the RMB should a!!reciate (et3een ,); to =+;& de!ending on the analysis used- China has res!onded in many 3ays& !artly (y allo3ing a slo3 and steady revaluation and !artly (y arguing among other things that revaluation of the RMB 3ill not (alance trade flo3s since the US9China im(alance is caused (y many other factors& including a lac of saving on the !art of "mericans-

This !a!er uses highly aggregated time series data on US manufacturing to assess the claim that a rise in the RMB <or a fall in the USD> 3ould significantly ameliorate US manufacturing !erformance& es!ecially 3ith regard to gro3th in em!loyment& real 3ages& and out!ut- " num(er of results 3ere found-

?irst& there is evidence that a rise in the RMB has a !ositive and statistically significant relation on em!loyment gro3th in US manufacturing- .o3ever& this relation is not large in magnitude and therefore is economically inconse8uential& given !ast movements in the RMB- .o3ever& it is !ossi(le that larger movements in the RMB might generate even larger !ercentage movements in the gro3th of US em!loyment- But& since no such movements have (een forthcoming since ,**:& it is im!ossi(le to identify ho3 that em!loyment 3ould react to larger increases in the value of the Chinese yuan-

Second& granted that increases in the RMB might increase em!loyment in US manufacturing& these effects are d3arfed (y much larger effects if gro3th of US e#!orts are included in the regressions- That is& autonomous increases in e#!orts a!!ear to (e more im!ortant than currency revaluations& meaning that mar et o!ening initiatives for China may have much larger effects on US em!loyment than a sim!le increase in the RMB- " stronger RMB !ro(a(ly hel!s Chinese (uy "merican !roducts& (ut this is not o(vious 3hen e#!orts are e#cluded from the regressions- Barriers to "merican !roducts are !ro(a(ly more im!ortant to Chinese consumers than the value of the RMB- This fits 3ell into the notion that Chinese households are saving at very high rates- The u!shot here is that the trade im(alance is !ro(a(ly influenced more (y mar eting channels F smooth and o!en from China to US and difficult and narro3 from US to China F than (y any undervaluation of the RMB- Hie3ed in this 3ay& the (arriers to mar eting channels are a

significant !art of the full !rice of US !roducts to Chinese& even after correction (y a !ossi(le undervalued RMB-

Third& (oth out!ut gro3th and !roductivity gro3th have !rofound effects on the gro3th of em!loyment in US manufacturing F far greater than anything that could (e achieved (y revaluation of the RMB- Hariations in out!ut gro3th& es!ecially over the (usiness cycle have an enormous influence on em!loyment& 3hile gro3th of !roductivity has a clear inverse relation 3ith em!loyment gro3th- This is as 3e 3ould e#!ect and confirms 3hat many have claimed is going on in most of the develo!ed countries of the 3orld- Thus& much of the !ain in US manufacturing is due to the (usiness cycle and normal gro3th in !roductivity-

?ourth& the gro3th in real com!ensation of US manufacturing 3or ers is negatively related to the value of the RMB <!ositively related to the value of the USD>- Essentially this can (e e#!lained (y saying that a rise in the RMB is associated 3ith a fall in the value of the USD- Those 3or ers in manufacturing 3ho retain their 7o(s must (uy goods <many of 3hich are im!orted from China> at a higher !rice due to the falling USD and this lo3ers the real 3age they are !aid- Be should note that this is fully aggregated manufacturing data and that there may very 3ell (e differing effects on certain su(9 industries 3ithin the overall manufacturing industry& es!ecially those small sets of su(9 industries that are in direct com!etition 3ith Chinese im!orts- More detailed US data needs to (e considered to ma e a definitive statement a(out real com!ensation-

?ifth& the gro3th in real com!ensation to manufacturing 3or ers is strongly related to the gro3th in !roductivity& sho3ing that !roductivity gro3th is a t3o9edged s3ord 3hich

eliminates em!loyment in manufacturing on the one hand 3hile raising real com!ensation for those 3ho retain their 7o(s on the other hand-

Si#th& there is a small (it of evidence that revaluation of the RMB 3ould !romote greater gro3th in manufacturing out!ut& (ut this is again over3helmed (y real e#!ort gro3th 3hen e#!orts enter the regression- $i e em!loyment& mar et o!ening initiative a!!ear to (e a (etter means of s!urring out!ut gro3th in the future& com!ared 3ith increases in the RMB- This vie3 ho3ever is (ased on historical movements in the RMB and cannot hel! in determining 3hat might ha!!en if the RMB 3ere to rise su(stantially-

The overall results of this em!irical study seem to indicate that US officials& researchers& and commentators 3ho are ma ing strong calls for revaluation of the RMB are focusing on the 3rong channel of influence and should instead (e loo ing to (etter o!en China6s vast consumer and !roducer mar ets to "merican goods- "s China6s mar eting structure moderni%es and domestic firms arise 3ith a national reach& US manufacturers should consider utili%ing these firms through 7oint ventures to hel! mar et their !roducts to Chinese consumers- This is not to say that RMB valuations are not im!ortant& (ut such revaluations are more li ely to (enefit Chinese macroeconomic& (an ing& and financial sta(ility rather than ma e su(stantial changes in the (ilateral trade im(alance 3ith the US-

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Bernard& "-& )++*- Trends in Manufacturing- Pers!ectives& Statistics Canada& <DA9++,9O>& !!-A9,1Chan& S-& )+,+- Currency Rift Bith China E#!oses Shifting Clout- Ce3 5or TimesCheung& 5-9B-& Chinn& M-D- / ?u7ii& E-& )+,+- Measuring Misalignment4 $atest Estimates for the Chinese 5uanCline& B-R-& )+,+- Renmin(i Undervaluation& Chinas Sur!lus& and the US Trade DeficitPeterson 'nstitute for 'nternational Economics& <PB,+9)+>& !!-,9DDertou%os& Michael $& Richard K- $ester& and Ro(ert Solo3- ,*0*- )ade in America* +e,ainin, the Productive (d,e& The M'T Press& Cam(ridge& M"Ed3ards& $- / $a3rence& R-N-& )+,+- US Trade and Bages4 The Misleading 'm!lications of Conventional Trade Theory& Bashington& DC4 Peterson 'nstitute for 'nternational Economics?air& R-C-& )+,+- Estimated Macroeconomic Effects of a Chinese 5uan "!!reciationBusiness Economics& :A<:>& !!-)119):1?ran el& 2-"- / Bei& S-92-& )++D- "ssessing Chinas e#change rate regime- Economic Policy& !!-ADA9=)DIoldstein& M- / $ardy& C-& )++=- "ssociation Chinas E#change Rate Policy DilemmaThe "merican Economic Revie3& *=<)>& !!-:))9:)=Iris3old& D-& ,***- Trade& 2o(s& and Manufacturing4 Bhy <"lmost "ll> U-S- Bor ers Should Belcome 'm!orts- Cato 'nstitute4 Trade Briefing Pa!er& <Co-=>& !!-,9,:.ale& D-D- / .ale& $-.-& )++0- Reconsidering Revaluation The Brong "!!roach to the U-S-9Chinese Trade 'm(alance- ?oreign "ffairs& !!-,9:.art9$ands(erg& M-& )+,+- The U-S- Economy and China4 Ca!italism& Class& and Crisis 44 Monthly Revie3- Monthly Revie3& =,.ill& Carter R- & Iriffiths& Billiam E- / $im& Iuay C- )++0- Princi!les of Econometrics&

1rd edition- 2ohn Biley / Sons& Ce3 2ersey.sieh& C-9T- / @ssa& R-& )+,,- " Ilo(al Hie3 of Productivity Iro3th in China& Cam(ridge& M"4 Cational Bureau'to& T-& )+,+- Chinas !ro!erty (u((le is 3orse than it loo s- The ?inancial Times2ohnson& 2r-& B-"-& )++*- 'm!act of Ilo(ali%ation and Trade 3ith China on Ce3 5or Com!anies and Communities& Testimony (efore the U-S- F China Economic and Security CommissionKollmeyer& C-& )++*- E#!laining Deindustriali%ation4 .o3 "ffluence& Productivity Iro3th& and Ilo(ali%ation Diminish Manufacturing Em!loyment- The "merican 2ournal of Sociology& ,,:<=>& !!-,=::9,=D:$u & S-K-& )+,+- Understanding Chinese Renmin(i "!!reciation4 " Microfounded Model 3ith 'm!erfect Ca!ital Mo(ilityMa& I- / McCauley& R-C-& )+,,- The evolving renmin(i regime and im!lications for "sian currency sta(ility- 2ournal of 2a!anese 'nternational Economies& )A& !!-)1910McKinnon& R-& )++=- "ssociationChinas E#change Rate Tra!4 2a!an Redu#R The "merican Economic Revie3& *=<)>& !!-:)D9:1,Montresor& S- / Mar%etti& I-H-& )+,,- The deindustrialisationEtertiarisation hy!othesis reconsidered4 a su(system a!!lication to the @ECDD- Cam(ridge 2ournal of Economics& 1A& !!-:+,9:),Morrison& B-M-& )+,+- China9U-S- Trade 'ssues& Bashington& DC4 Congressional Research ServiceMorrison& B-M- / $a(onte& M-& )+,+- Chinas Currency4 "n "nalysis of the Economic 'ssues& Bashington& DC4 Congressional Research ServiceCic ell& S-& Redding& S- / S3affield& 2-& )++0- The Uneven Pace of Deindustrialisation in the @ECD- The Borld Economy& !!-,91,Min& D- / .e& O-& )+,+- 's the Chinese Currency Su(stantially Misaligned to Barrant

?urther "!!reciationR& E7ournal-orgRich& D-& )+,+- Changing Elasticities of $a(or Demand in U-S- Manufacturing- "tlantic Economic 2ournal& 10& !!-,AD9,=0Rima& '-& )+,+- The Political Economy of the Undervalued Renmin(i& Philadel!hia& Pennsylvania4 Tem!le UniversityRo3thorn& R- / Coutts& K-& )++:- De9industriali%ation and the Balance of Payments in "dvanced Economies& Ce3 5or 4 United Cations Conference on Trade and Develo!mentSachs& 2-D- et al-& ,**:- Trade and 2o(s in U-S- Manufacturing- Broo ings Pa!ers on Economic "ctivity& ,**:<,>& !!-,90:Sato& K-& Shim%u& 2- / Nhang& N-& )+,+- Ce3 Estimates of the E8uili(rium E#change Rate4 The Case for the Chinese Renmin(i- R'ET' Discussion Pa!er& Series ,+9E9+:A& !!-,9):Su(ramanian& "-& )+,+- Ce3 PPP9Based Estimates of Renmin(i Undervaluation and Policy 'm!lications& Bashington& DC4 Peterson 'nstitute for 'nternational EconomicsThor(ec e& B-& )+,+- Bill a(andoning the dollar !eg hel! China re(alance its economyR vo# 9 Research9(ased !olicy analysis and commentary from leading economists& !!-,9:Tyers& R- / Nhang& 5-& )+,,- "!!reciating the Renmin(i- The Borld EconomyBhalley& 2- / Bang& $-& )+,,- The im!acts of Renmin(i a!!reciation on trade flo3s and reserve accumulation in a monetary trade model- Economic Modelling& )0& !-=,:F =),Boo& B-T-& )++0- Understanding the Sources of ?riction in U-S-FChina Trade Relations4 The E#change Rate De(ate Diverts "ttention from @!timum "d7ustment- "sian Economic Pa!ers& D<1>& !!-=A9**Oing& 5-& )+,+- The 5uans E#change Rates and Pass9through Effects on the Prices of 2a!anese and US 'm!orts& To yo4 "sian Develo!ment Ban 'nstitute-

5u& M-& )+,+- Does "!!reciation of the RMB Decrease 'm!orts to the U-S- from ChinaR& Bei7ing4 China Center for Economic Research-

Table 1A
Nominal OLS Regressions/Without Exports*
Dependent ariable ! "er#entage $hange in %anu&a#turing Emplo'ment

ariable
constant

,
+-++10A <+-D0> +-:*0+ <,)-0:>SSS 9+-10,* <9=-=0>SSS 9+-++A+ <9+-D+>

E(uation )
9+-++)+ <91-=D>SSS +-:0,+ <,)-+*>SSS 9+-101+ <9=-*)>SSS 9+-++AA <91-+,>SSS T

1
+-++D, <,-)+> +-:*++ <,,-,+>SSS 9+-11,) <9:-*A>SSS 9+-++A1 <9+-=:> 9+-+++0 <9+-0D>

:
9+-++): <91-:D>SSS +-:A0+ <*-=1>SSS 9+-1:)0 <9A-)+>SSS 9+-++=) <91-0:>SSS T

cycleTinde#

9+-+++0 <9+-A+>

;TdurTcons log<manufTem!> t9,

9+-+:,) <9,-+:> +-))*D <1-)1>SSS

9+-+=A, <9,-)*>

+-))=D <1-:D>SSS +-,=*= <1-0*>SSS 0D4:U,+4: *1 +-0* 5es T T

+-1,)D <1-:1>SSS +-,1D0 <,-0:>S *:4,U,+4: =0 +-0* Co +-,, +-),

+-1+=, <1-*,>SSS +-,+0+ <)-1+>SSS *:4,U,+4: =0 +-*+ 5es T T

log<manufTem!> t9)

+-,0*A <1-+=>SSS

Sam!le Period Co- @(sR9s8 ."C Est$M "uto !9value $M .etero !9value
SCote4

0D4:U,+4: *1 +-0* Co +-:0 +-,A

"ll regressions in Ta(les ," and ,B a(ove use the nominal e#change rate <RMBEUSD>- Regressions em!loying the real

e#change rate as ad7usted (y the relative CP's of the US and China are contained in Ta(les ,C and ,D-

Table 1)
Nominal OLS Regressions *ith Exports
Dependent ariable ! "er#entage $hange in %anu&a#turing Emplo'ment

ariable
const

,
+-++1, <+-=1> +-::*1 <*-=)>SSS 9+-1A+D <9A-*:>SSS 9+-++1* <9+-AA>

E(uation )
+-++1, <+-D,> +-::*1 <D-A=>SSS 9+-1A+D <9=-):>SSS 9+-++1* <9,-*,>S 9+-+++: <9+-,*> 9+-+:,, <9,-,,> +-+):+ <,-D=>
S

1
+-++:1 <+-=*> +-:1:= <D-=1>SSS 9+-)*** <9:-11>SSS 9+-++1, <9+-1D> 9+-++,0 <9+-00> 9+-+::D <9+-0=> +-+)=+ <,-A1> +-1,,) <1-:A>SSS +-,A== <)-+*>
SSS

:
+-++:1 <+-0*> +-:1:= <=-)A>SSS 9+-)*** <9:-AA>SSS 9+-++1, <9,-D)>S 9+-++,0 <9+-D)> 9+-+::D <9,-+0> +-+)=+ <,-A,> +-1,,) <:-+,>SSS +-,A== <1-,,>SSS

cycleTinde#

9+-+++: <9+-):>

;TdurTcons

9+-+:,, <9,-+1> +-+):+ <,-0+>

S

Vlog<manufTem!> t+1

+-))+* <1-,:>SSS

+-))+* <1-:,>SSS +-)+0* <:-D+>

SSS

Vlog<manufTem!> t+,

+-)+0* <1-1=>
SSS

Sam!le Period Co- @(s$M "uto !9value $M .etero !9value

0D4:U,+4: *1 +-)0 +-,*

0D4:U,+4: *1 T T

*:4,U,+4: =0 +-+A +-)A

*:4,U,+4: =0 T T

Table 1$
Real OLS Regressions/Without Exports
Dependent ariable ! "er#entage $hange in %anu&a#turing Emplo'ment

ariable
constant

,
+-++:D, <+-D,> +-:00+ <,,-+,>SSS 9+-11+* <9:-*:>SSS 9+-+)=) <9+-*1>

E(uation )
+-++:D, <+-*D> +-:00+ <*-+0>SSS 9+-11+* <9A-))>SSS 9+-+)=) <9,-=> 9+-++,A <9+-AA> 9+-+A+) <9,-,0> +-1+)* <1-0*>SSS +-,),D <)-1)>SSS *:4)U,+4: =D +-*, 5es T T

1
9+-++1+ <9:-+=>SSS +-:=:* <,,-0+>SSS 9+-11D= <9A-+=>SSS 9+-+:)D <9,-=D> T

:
9+-++1+ <9:-++>SSS +-:=:* <,+-+:>SSS 9+-11D= <9A-)=>SSS 9+-+:)D <9)-=)>SS T

cycleTinde#

9+-++,A <9+-D,>

;TdurTcons log<manufTem!> t9,

9+-+A+) <9+-*1> +-1+)* <1-)*>SSS

+-)*+= <1-)D>SSS +-+*)0 <,-)0> *:4)U,+4: =D +-*+ Co +-1,) +-+))

+-)*+= <1-D1>SSS +-+*)0 <,-0:>S *:4)U,+4: =D +-*+ 5es T T

log<manufTem!> t9)

+-,),D <,-A0>

Sam!le Period Co- @(sR9s8 ."C Est$M "uto !9value $M .etero !9value

*:4)U,+4: =D +-*, Co +-,,1 +-,D

Table 1D
Real OLS Regressions/With Exports
Dependent ariable ! "er#entage $hange in %anu&a#turing Emplo'ment

ariable
constant

,
+-++101 <+-=)> +-:1++ <D-A:>SSS 9+-)*0: <9:-1)>SSS

E(uation )
+-++101 <+-0+> +-:1++ <=-,A>SSS 9+-)*0: <9:-A,>SSS 9+-++,* <9+-0,> 9+-+10A <9+-*:> +-+1,, <,-D:>S +-1,)= <:-+A>SSS +-,=++ <1-)1>SSS *:4)U,+4: =D +-*, 5es T T

1
9+-++)= <9:-+0>SSS +-1*+, <D-D1>SSS 9+-1++A <9:-1A>SSS T

:
9+-++)= <9:-,D>SSS +-1*+, <=-D)>SSS 9+-1++A <9:-=0>SSS T

cycleTinde#

9+-++,* <9+-*D>

;TdurTcons

9+-+10A <9+-D1>

log<rTUSTe#!orts>

+-+1,, <,-=D>

+-+1D1 <)-,+>SS +-)**+ <1-:)>SSS +-,:D: <)-+,>SS *:4)U,+4: =D +-*, Co +-,, +-),

+-+1D1 <)-1A>SS +-)**+ <1-**>SSS +-,:D: <1-+1>SSS *:4)U,+4: =D +-*, 5es T T

log<manufTem!> t9,

+-1,)= <1-:0>SS

log<manufTem!> t9)

+-,=++ <)-,:>SS

Sam!le Period Co- @(sR9s8 ."C Est$M "uto !9value $M .etero !9value

*:4)U,+4: =D +-*, Co +-:0 +-,A

Table ,A
Nominal OLS Regressions Without Exports
Dependent ariable ! "er#entage $hange in %anu&a#turing Real $ompensation

ariable constant

,
9+-+,1A <9+-0D> 9+-:**+ <9:-10>
SSS

E(uations )
9+-++0+ <9:-,D>
SSS

1
9+-+)+* <9,-+:> 9+-A,1+ <91-D1>
SSS

:
9+-++0A <91-1+>SSS 9+-A,)+ <91-DA>SSS +-=A1: <1-:,>SSS +-+,,, <)-0*>SSS +-++*= <)-0+>SSS T

9+-:*=+ <9=-1,>
SSS

+-=D++ <:-)=>
SSS

+-==:1 <A-D0>
SSS

+-=A++ <1-1D>
SSS

9+-++A= <9+-):>

9+-++:* <9+-)0> +-++*+ <1-1,> T

SSS

+-+,+: <+-1A> +-++D* <1-1,> +-,,), <+-=A>

cycleTinde#

+-++0: <,-=D>
S

;TdurTcons

+-+:DD <+-1D>

Sam!le Period Co- @(sR9s8 ."C Est$M "uto !9value $M .et !9value

0D4:U,+4: *1 +-)1 Co +-:0 +-**

0D4:U,+4: *1 +-)1 5es T T

*:4,U,+4: =0 +-): Co +-:= +-D+

*:4,U,+4: =0 +-)1 5es T T

Table ,)
Nominal OLS Regressions With Exports
Dependent ariable ! "er#entage $hange in %anu&a#turing Real $ompensation

ariable
constant

,
9+-+,1A <9+-0D> 9+-:**+ <9:-10>
SSS

E(uations )
9+-++0+ <9:-,D>SSS 9+-:*=+ <9=-1,>
SSS

1
9+-+)+* <9,-+:> 9+-A,1+ <91-D1>
SSS

:
9+-++0A <91-1+>SSS 9+-A,)+ <91-D:>SSS +-=A1: <1-:,>SSS +-+,,, <)-0*>SSS +-++*= <)-0+>SSS T

+-=D++ <:-)=>
SSS

+-==:1 <A-D0>
SSS

+-=A++ <1-1D>
SSS

9+-++A= <9+-):>

9+-++:* <9+-)0> +-++*+ <1-1,> T

SSS

+-+,+: <+-1A> +-++D* <1-1,> +-,,), <+-=A>

cycleTinde#

+-++0: <,-=D>
S

;TdurTcons

+-+:DD <+-1D>

log<USTE#!orts>

9+-+D1, <9,-==>

9+-+D1, <9,-*,>S

9+-+D:+ <9,-)A>

9+-+D:+ <9,-=:>

Sam!le Period Co- @(sR9s8 ."C Est$M "uto !9value $M .et !9value

0D4:U,+4: *1 +-)1 Co +-:0 +-**

0D4:U,+4: *1 +-)1 5es T T

*:4,U,+4: =0 +-)= Co +-): +-0*

*:4,U,+4: =0 +-)= 5es T T

Table ,$
Real OLS Regressions Without Exports
Dependent ariable ! "er#entage $hange in %anu&a#turing Real $ompensation

E(uation ariable
constant

,
9+-+))1 <9,-+A> 9+-A,0, <91-=0>
SSS

)
9+-+))1 <9,-AA> 9+-A,0, <9A-+1>
SSS

1
9+-++0= <9,-:1> 9+-A,1A <91-=D>
SSS

:
9+-++0= <9)-::> 9+-A,1A <9A-,0>SSS +-=AD1 <:-::>SSS

+-==)+ <1-)=>
SSS

+-==)+ <:-A)>
SSS

+-=AD1 <1-)A>
SSS

9+-+,:, <9+-,=>

9+-+,:, <9+-,*> +-++0+ <)-1)>

SS

9+-++,, <9+-+,> +-++*D <,-A,> T

9+-++,, <9+-+)> +-++*D <)-=D>SSS T

cycleTinde#

+-++0+ <,-,=>

;TdurTcons

+-,)+: <+-=D>

+-,)+: <,-++>

Sam!le Period Co- @(sR9s8 ."C Est$M "uto !9value $M .et !9value

*:4)U,+4: =D +-): Co +-:0 +-01

*:4)U,+4: =D +-)1 5es T T

*:4)U,+4: =0 +-): Co +-:0 +-A+

*:4)U,+4: =D +-)1 5es T T

Table ,D
Real OLS Regressions With Exports
Dependent ariable ! "er#entage $hange in %anu&a#turing Real $ompensation

E(uation ariable
constant

,
9+-+,:* <9+-=D> 9+-:)DA <9)-)0>
SS

)
9+-+,:* <9+-0A>
SSS

1
9+-++DA <9,-+:> 9+-:,+) <91-D1>
SSS

:
9+-++DA <9)-:D>SS 9+-:,+) <91-:*>SSS +-=,:D <:-:0>SSS 9+-+A:+ <9,-,D> +-++00 <)-0)>SSS T

9+-:)DA <91-)+>
SSS

+-=,*1 <1-,+>
SSS

+-=,*1 <:-A+>
SSS

+-=,:D <1-1D>
SSS

9+-+:A1 <9+-=*>

9+-+:A1 <9+-0+> +-++0+ <)-::>

SS

9+-+A:+ <9+-0*> +-++00 <,-10> T

cycleTinde#

+-++0+ <,-,A>

;TdurTcons

+-+=AD <+-1A>

+-+=AD <+-:A>

Sam!le Period Co- @(sR9s8 ."C Est$M "uto !9value $M .et !9value

*:4)U,+4: =D +-): Co +-1: +-0)

*:4)U,+4: =D +-): 5es T T

*:4)U,+4: =D +-): Co +-)= +-=*

*:4)U,+4: =D +-): 5es T T

Table -A
Nominal OLS Regressions Without Exports
Dependent ariable ! "er#entage $hange in the .S /ndustrial "rodu#tion /ndex

ariable constant

,
+-++)A <+-)1> ,-)1A+ <D-:0>
SSS

E(uations )
9+-++00 <91-+0>
SSS

1
9+-++,: <9+-,,> ,-,D*+ <=-,=>
SSS

:
9+-++** <91-:D>SSS ,-,:D+ <A-:0>SSS +-++=* <,-0D>S 9+-+,A) <91-A+>SSS T

,-,**+ <A-*0>
SSS

cycleTinde#

+-++=+ <,-D:>
S

+-++A1 <,-A:> 9+-++=D <9,-+A> T

+-++DD <,-D)>
S

9+-++:D <9+-)*>

9+-+,:: <9+-D0,> 9+-+D=+ <9+-=*1>

;Tdura(les

9+-+*=+ <9,-+0>

+-=)=: <D-:=>
SSS

+-=11, <D-1:>
SSS

+-=0=* <=-:*>
SSS

+-=*=A <9D-*+>SSS

9+-)=A= <91-A:>SSS

9+-)01: <91-1,>SSS

9+-1+*0 <91-:)>SSS

9+-1)), <9)-*D>SSS

Sam!le Period Co- @(sR9s8 ."C Est$M "uto $M .etero

0D4:U,+4: *1 +-0+ Co

0D4:U,+4: *1 +-0+ 5es T T

*:4,U,+4: =0 +-01 Co

*:4,U,+4: =0 +-01 5es T T

Table -)
OLS Regressions With Exports
Dependent ariable ! "er#entage $hange in the .S /ndustrial "rodu#tion /ndex

ariable constant

,
9+-+++0 <9+-+0> ,-+0+* <=-):>
SSS

E(uations )
9+-+++0 <9+-+D> ,-+0+* <=-*A>
SSS

1
9+-+,)A <9+-*=> +-*D10 <:-0*>
SSS

:
9+-+,)A <9,-,0> +-*D10 <=-+*>SSS +-++D) <,-:D> 9+-++:) <9+-=*> +-+,** <+-):> +-+0:1 <)-:)>SS +-AA)* <A-:=>SSS 9+-):1) <9)-1D>SS

cycleTinde#

+-++=* <)-+A>
SS

+-++=* <,-*:>
S

+-++D) <,-=0>
S

9+-++,+ <9+-+=>

9+-++,+ <9+-,=> 9+-+DAA <9+-*1> +-+=A: <)-1:>SS +-A1== <=-A0>

SSS

9+-++:) <9+-)1> +-+,** <+-,0> +-+0:1 <)-A*>SS +-AA)* <:-0=>

SSS

;Tdura(les

9+-+DAA <9+-0D>

Vlog<USTE#!orts>

+-+=A: <)-:+>SS

Vlog<indT!rod> t+1

+-A1== <A-*=>
SSS

Vlog<indT!rod> t+,

9+-)1,0 <91-,)>
SSS

9+-)1,0 <9)-*A>
SSS

9+-):1) <9)-=*>
SSS

Sam!le Period Co- @(sR9s8 ."C Est$M "uto ! value $M .etero ! value

0D4:U,+4: *1 +-0, Co +-+, +-+)

0D4:U,+4: *1 +-0, 5es T T

*:4,U,+4: =0 +-0A Co +-+0 +-+1

*:4,U,+4: =0 +-0A 5es T T

Table -$
Real OLS Regressions Without Exports
Dependent ariable ! "er#entage $hange in the .S /ndustrial "rodu#tion /ndex

ariable constant

,
9+-++1: <9+-)A> ,-,*+0 <=-,A>
SSS

E(uations )
9+-++1: <9+-1:> ,-,*+0 <A-DA>
SSS

1
9+-+,+D <9)-*0>
SSS

:
9+-+,+D <91-)0>SSS ,-,D*+ <A-:0>SSS +-++DD <,-**>S 9+-+:+D <9+-*A> T

,-,D*+ <=-,*>
SSS

cycleTinde#

+-++0+ <,-DA>
S

+-++0+ <)-+*>
SS

+-++DD <,-=0> 9+-+:+D <9+-D1> T

9+-+1)1 <9+-A=>

9+-+1)1 <9+-=0> 9+-+=1= <9+-0A>

;Tdura(les

9+-+=1= <9+-A=>

+-=01A <=-1*>
SSS

+-=01A <D-),>
SSS

+-=0*A <=-A)>
SSS

+-=0*A <9D-AA>SSS

9+-1))= <91-:+>SSS

9+-1))= <9)-*A>SSS

9+-11A* <91-=0>SSS

9+-11A* <91-,0>SSS

Sam!le Period Co- @(sR9s8 ."C Est$M "uto !9value $M .etero !9value

*:4)U,+4: =D +-01 Co +-+, +-++

*:4)U,+4: =D +-01 5es T T

*:4)U,+4: =D +-01 Co +-+) +-++

*:4)U,+4: =D +-01 5es T T

Table -D
Real OLS Regressions With Exports
Dependent ariable ! "er#entage $hange in the .S /ndustrial "rodu#tion /ndex

ariable constant

,
9+-+,1+ <9+-*0> +-*D:+ <:-01>
SSS

E(uations )
9+-+,1+ <9,-)1> +-*D:+ <=-,1>
SSS

1
9+-++:= <91-A=>SSS ,-,+)* <=-,*> K
SSS

:
9+-++:= <9)-00>SSS ,-,+)* <A-,D>SSS K

cycleTinde#

+-++=0 <,-AD>

+-++=0 <,-1*> +-+1+0 <+-1=> +-+*++ <)-1A>

SS

;Tdura(les

+-+1+0 <+-)D>

Vlog<rTUSTE#!orts>

+-+*++ <)-:=>
SS

+-+0:, <)-:0>
SS

+-+0:, <)-+0>SS +-=)+0 <A-++>SSS 9+-),:A <9)-+A>SS

Vlog<indT!rod> t+1

+-AA1* <:-0+>
SSS

+-AA1* <A-1*>
SSS

+-=)+0 <A-==>
SSS

Vlog<indT!rod> t+,

9+-)10: <9)-=)>
SS

9+-)10: <9)-1:>
SS

9+-),:A <9)-1D>
SSS

Sam!le Period Co- @(sR9s8 ."C Est$M "uto ! value $M .etero ! value

*:4)U,+4: =D +-0A Co +-+ +-+*

*:4)U,+4: =D +-0A 5es T T

*:4,U,+4: =0 +-0A Co +-+0 +-+1

*:4,U,+4: =0 +-0A 5es T T