How Changes in the Value of the Chinese Currency Affect U.S. Imports

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CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE

How Changes in the Value of the Chinese Currency Affect U.S. Imports

Index: June 2005 = 100
120

115

Value of Renminbi Relative to Dollar

110

105

100

Prices of U.S. Imports from China

95 0 Dec. 2004

Mar. 2005

June 2005

Sept. 2005

Dec. 2005

Mar. 2006

June 2006

Sept. 2006

Dec. 2006

Mar. 2007

June 2007

Sept. 2007

Dec. 2007

Mar. 2008

JULY 2008

Pub. No. 3148

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CBO
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How Changes in the Value of the Chinese Currency Affect U.S. Imports July 2008

The Congress of the United States O Congressional Budget Office

Preface

his Congressional Budget Office (CBO) paper discusses factors that would limit the benefit to U.S. manufacturers from a potential appreciation of the Chinese currency. In keeping with CBO’s mandate to provide objective, nonpartisan analysis, the report makes no recommendations. Bruce Arnold of CBO’s Microeconomic Studies Division wrote the paper under the supervision of Joseph Kile and David Moore. Inside CBO, William Randolph provided valuable guidance at several points in the development of the project, and David Brauer, Justin Falk, Juann Hung, Jonathan Huntley, and Mark Lasky reviewed various drafts. Outside CBO, Judith Dean, Michael Ferrantino, and Zhi Wang, staff of the U.S. International Trade Commission, and Morris Goldstein at the Peterson Institute for International Economics provided comments. (The assistance of external reviewers implies no responsibility for the final product, which rests solely with CBO.) Leah Mazade edited the paper, and Sherry Snyder proofread it. Maureen Costantino designed the cover and prepared the paper for publication. Lenny Skutnik printed copies of the paper, Linda Schimmel handled the print distribution, and Simone Thomas produced the electronic version for CBO’s Web site (www.cbo.gov).

T

Peter R. Orszag Director July 2008

Contents
Introduction and Summary Recent Movements in China’s Currency and in the Prices of U.S. Imports The Scope of CBO’s Analysis Reasons for the Low Domestic Value Added of Chinese Exports and the Offsetting Changes in Other U.S. Imports What Is the Domestic Value Added of Chinese Exports? Determining Domestic Value Added Changes Over Time in Domestic Value Added Effect on Prices of Exports How Much Would Declines in Imports from China Be Offset by Increases in Imports from Other Countries? Methodology and Data for CBO’s Analysis CBO’s Results and Their Implications Comparison with Other Estimates 1 2 3 4 5 5 6 6 8 9 11 12

Tables
1. Percentage of Foreign-Sourced Intermediate Inputs in Chinese Exports, by Source Country 2. Estimates of Domestic Value Added of Chinese Exports 3. Largest Increases in Market Shares of Chinese Imports and Changes in Market Shares of Imports from the Rest of the World, 1998 Through 2005 4 7

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Figure
1. Renminbi/Dollar Exchange Rates and Dollar Prices of U.S. Imports from China 3

How Changes in the Value of the Chinese Currency Affect U.S. Imports

Introduction and Summary
Rapid growth in imports of merchandise from the People’s Republic of China over the past decade has posed a challenge for competing U.S. manufacturers. The value of those imports quintupled between 1997 and 2007, rising from $65 billion to $342 billion.1 By comparison, during the same period, the value of such imports from other countries doubled, growing from $825 billion to $1,664 billion. By 2007, China was the largest supplier of U.S. imports, accounting for 17 percent of all imported manufactured goods. A further indication of the growing competition to manufacturers in the United States and in other countries is that in 2006, China’s mounting current-account surplus with the world reached $250 billion, or 9 percent of its gross domestic product.2 Some observers believe that the Chinese government has contributed to growth in U.S. imports by maintaining an undervalued...
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