VoxEU Column Exchange Rates

Will Chinese revaluation create American jobs?

Many in the US are pushing China to revalue the renminbi. Will that create US jobs? Traditional Keynesian analysis associates higher exports and lower imports with more jobs, but today’s world is more complex. Chinese parts and components feed into US firms’ global competitiveness. This column says a dearer renembi would boost the competitiveness of US exports to China but reduce US competitiveness everywhere else. A revaluation may be the right policy for other reasons, but its impact on US jobs is far from clear.

Undervaluation of China’s exchange rate is central to the debate on the right global policy mix in the aftermath of the economic crisis. Estimates of the undervaluation vary (from zero to 40%, Cheung, Chinn, and Fuji 2010) along with the reasons for focusing on the renembi:

  • The IMF expresses concern about persistent capital account imbalances and asymmetries between surplus and deficit countries, with concern that imbalances contributed to past global financial instability and could so in future. The IMF also calls an exchange rate appreciation “essential” for China’s domestic macroeconomic situation (IMF 2010).
  • Senior Brazilian and Indian officials call upon their Chinese counterparts to revalue the renminbi to mitigate competitiveness concerns.
  • In the US, some call for revaluation as a means of redressing the bilateral imbalance with China and quickly creating US jobs.

In this column, we focus on the last issue; that is, whether it is realistic to expect a US jobs bonus to follow a Chinese revaluation.

US jobs and the renminbi-dollar exchange rate

Like the extent of undervaluation itself, the actual jobs impact of any revaluation is difficult to estimate. A recent study by one of us finds that a revaluation of the Chinese renminbi will actually lead to job losses in the US while predicting that the US trade balance will improve after such a revaluation (Francois 2010). A similar finding is reported by Fair with respect to revaluation of the renminbi in the recent past (Fair 2010).

Prominent analysts have questioned such findings, appealing to the long held rule-of-thumb that reductions in the trade deficit must expand total US employment, even if some reshuffling between sectors does occur. Indeed, claims of possible job gains have sometimes been massive (Krugman 2010a,b).1 Yet others have noted both that, in the past, US employment and output growth is usually associated with expanding current account deficits, and also that the bilateral deficit actually expanded after the last round of revaluation. (See Levy 2010, who provides a good summary of this discussion on the policy circuit, and Barfield 2010.)

This matter has serious policy significance; it is not simply a dry, technical matter. Critics of China's currency regime are arguing that if Beijing does not revalue soon, then imports from China should be whacked with high import tariffs (Krugman 2010a). An open call for a trade war – no matter its pedigree – is particularly misconceived if revaluation of the renminbi might actually cost American jobs!

In this column we compare three general approaches to estimating the impact of a Chinese revaluation against the US dollar on the US labour market. Ultimately, the question is: how can analysts estimate accurately the impact of revaluation on US national output and then on employment? A number of factors prove to be important – and the approaches considered here differ markedly in what factors they take into account and the answers they provide.

Approach 1: From accounting identities to back-of-the-envelope calculations

Some analysts start with the basic national income accounting identity, Y=C+I+G+(X-M), where the current account, (X-M), is the difference between national exports and imports.2 In 2009 the current account deficit amounted to 2.87% of GDP (see Appendix Table 1).

If one takes the accounting relationship as causal, exports are good for jobs and imports are bad for jobs; eliminating the deficit ought to boost US employment and US GDP by roughly 2.87% – assuming there is spare capacity and high unemployment. With the US workforce at about 130 million workers, that means millions of more jobs.

Applying this reasoning to the US bilateral deficit with China – which amounts to 1.45% of US GDP – analysts suggest that closing the gap would create roughly 1.9 million jobs. More generally from 2009 data, with the implied proportional relationship between GDP and employment, each $1 billion gain in exports "creates" 9000 jobs under this back-of-the-envelope approach. Similar estimates from the US Department of Commerce based on 2008 data provide a ratio of roughly 8000 jobs per $1 billion in exports.

Unfortunately this approach suffers from a fallacy (Levy 2010); current averages tell us nothing about the incremental impact of future changes in trade on future employment. Indeed the US Department of Commerce provides a warning label along with its estimates:

"Averages derived from IO analysis should not be used as proxies for change. They should not be used to estimate the net change in employment that might be supported by increases or decreases in total exports, in the exports of selected products, or in the exports to selected countries or regions." US Department of Commerce (2010, page 3)

Approach 2: Incorporating the price responsiveness of total imports and exports

A more elaborate alternative involves applying aggregate trade elasticities to estimate the change in exports and imports either vis-a-vis the world as a whole or, in the case at hand, to and from China.

An important factor in such a calculation is the price responsiveness of US imports and exports. Here again, the literature offers different pointers.

  • Chinn (2005) is somewhat pessimistic on the price sensitivity of trade, estimating that the aggregate US import elasticity is approximately -0.49, while the export price elasticity is around 0.80.
  • Other available estimates (including Boyd et al 2001) are somewhat higher, though still too low to allow for massive job creation from renminbi revaluation.

Marquez and Schindler (2007), focusing on the impact of a hypothetical 10% revaluation, conclude that there is little evidence that China’s imports will respond significantly, while the impact on exports would be relatively small (a 1% drop in export shares). They also find that the composition of trade matters and focusing on aggregate trade is likely to overstate effects. (We return to this point in the next section.)

Table 1 presents the first two of four estimates of the the impact on US jobs.3 The first two sets of estimates follow from the national accounting identity discussion above, combined with the import and export price elasticities from Boyd et al (2001) and Broda et al (2008). (Using the elasticities from Chinn 2005 would yield smaller positive effects). These elasticities have been used to first estimate the impact of a 10% revaluation on imports and exports. The implied change in the current account is then converted into changes in GDP and ultimately to changes in total employment.

Table 1: The effect on US employment of a 10% revaluation of the renminbi

Computational method
US jobs
1) elasticity based impact of 10% revaluation on all trade
2) elasticity based impact of 10% revaluation on trade with China

Both approaches implicitly assume that $1bn in net exports supports about 9000 jobs.

Approach 3: Taking account of trade in parts and components

Another factor that is important in evaluating the impact of any contemporary revaluation of the Chinese currency is the role that imports play in the competitiveness of US firms.

As Figure 1 shows, much of what China exports to the US is destined for US firms. Indeed, this is not just true for imports from China, but for all imports. Consequently, imports from China and elsewhere feed into the overall cost structure of the US economy and thus influence the global competitiveness of US firms. Taking account of this channel will clearly change the estimates – a dearer renembi would boost the competitiveness of US exports in China, but it would also reduce global US competitiveness via higher prices for intermediate inputs incorporated in US products. It also means higher prices for consumers. Indeed several classes of economic models integrate such intermediate-goods linkages between imports and exports (see for example Hertel 1997, Francois and Reinert 1997, and Lane 2001).

Figure 1. US imports from China, by use (percent of total)

Source: Based on data from BEA, GTAPV7, and USITC

In what follows we report estimates of the effects of Chinese revaluation of the renminbi on US employment levels from representatives of two classes of model. In both cases the starting point is the same – current (or 2009, which is close to current) US labour market conditions, where spare capacity and zero borrowing costs imply that aggregate demand changes affect jobs more than wages in the near term.

The estimates are presented in Table 2. The third estimate (see Table 1 for the first two) arose from the application of a spreadsheet-based “computable general equilibrium” or CGE model of the US economy (known as the "123 model," from Devarajan et al 1997). In this case, we have modified the model to:

  • embody aggregate import and export price elasticities,
  • differentiate between imports from China and third countries, and
  • include a labour market characterized by unemployment.

This approach is more complex than those mentioned above. It captures the contribution of imports to overall costs in the economy and embodies more details on the fiscal structure of the US economy (i.e. borrowing needs of the public sector).

Table 2: The effect on US employment of a 10% revaluation of the renminbi

Computational method
US jobs
3) simple single-sector CGE model, 10% revaluation
4) multi-sector CGE estimate 10% revaluation

The fourth and last set of estimates uses a much more complex, multi-sector CGE model. In this last case, the model is a standard version of the GTAP model (Hertel 1997) – again modified to include scope for revaluation and for unemployment. Here, the trade elasticities used are at a more disaggregated level and are again based on econometric estimates (Hertel et al 2005).

Comparing the results in Tables 1 and 2 highlights the importance of the approach taken. At first glance, simple accounting identities suggest that renminbi revaluation, if followed by an improvement in the US current account, should lead to immediate and direct net US job creation. However, accounting identities may actually reveal little about causality. Imports of parts, components, and other non-finished goods are important determinants of the cost structure of industries and this affects the ability of firms to hire workers at the prevailing wage.

Taking imported intermediates into account matters – it means that Chinese revaluation against the US dollar would results in US job losses. Just how many jobs would go following a Chinese revaluation of 10% differs across models. We privilege the fourth estimate, a loss of 424,000 American jobs, over the third because only the fourth economic model allows fully for the substitution of trade to and from third countries within sectors and for differences in the composition of trade across sectors.

Policy implications

In the first quarter of this year, US pressure – both from Congress and the administration – on the Chinese government to revalue the renminbi against the dollar intensified. There are a number of reasons for this pressure. Some are linked to global concerns about macro imbalances and stability. Others are linked to more local concerns and a belief that Chinese currency revaluation will create jobs in the US.

In a world where only finished goods were sold – where the principal effect of revaluations is on export prices – then it might have been sensible to link revaluation, current account improvements, and job creation. However, this is not the world we live in.

With extensive global supply chains and outsourcing, a modest Chinese revaluation will also raise costs for US firms and thus harm US competitiveness everywhere except in the Chinese market. This cost-raising effect mutes the current account improvement and, by our estimates, may result in 424,000 jobs losses in the US.

Findings such as these call for a rethink of aggressive foreign trade policy towards China, not just by the US but all those nations that supply and source parts and components to and from China as part of global supply chains.

Editors’ note: Promoting transparency

The spreadsheet CGE model and the datasets needed for the GTAP application, as well as the basic calculations in Table 1 and 2, are available here for downloading. Analysts can recalculate, modify or even replicate the results reported in this column. Disagreement is welcome and encouraged.


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Appendix Table 1. Basic macroeconomic data for 2009
US employment, thousands
National income, millions US dollars
Domestic absorption (C+I+G)
of which goods
of which goods to China
of which goods
of which goods from China
Trade balance
Other net payments
Current account balance
 of which deficit with China (including goods and services)
Source: Trade and employment data are from US BEA, as of early April 2010. Most of these are preliminary.

1 Krugman (2010a) claims that America had lost 1.4 million jobs because of the undervalued renminbi, and endorse trade protectionism against China. Krugman (2010b) advises the US Treasury Department to name China as a currency manipulator which is the first step towards imposing new tariffs (Barfield 2010).
2 Y is GDP, C, I and G are private consumption, investment and government consumption.
3 Base data for 2009 is reported in Appendix Table 1. We use an import price elasticity of 1.42 and an export price elasticits of 3.9. Goldstein and Khan (1978) provide direct export estimates in this range, while Broda et al (2008) report similar values from indirect estimates based on third country imports. We use the import demand elasticity from Boyd (2001) as reported by Chinn (2005).

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