EXECUTIVE SUMMARY
- The participation of China and its suppliers in the Global Value Chains has shaped a new North-South model of trade where exports from a developing economy (China) to advanced economies are affected by the trade it has with other developing countries.
- Due to this pattern of trade, a real appreciation in the Renminbi (RMB) decreases China’s imports from its trading partners, instead of increasing imports, which is commonly accepted in conventional wisdom.
- For ASEAN, a real appreciation in the RMB by 1% decreases China’s imports from the region by 0.35%, whereas in its traditional trade with the US as importer, a stronger USD by 1% induces an increase by 1.06% in the US’s imports from ASEAN.
- China’s policy of product diversification along with a policy of commercial partnership and cooperation with its regional partners (particularly focused on standardising tariffs in Developing Asia) is part of a premeditated strategy of resilience in the face of the real appreciation of its currency.
- Export diversification by ASEAN economies has proven to affect the responsiveness of China’s imports from these countries to the change in the RMB. The more ASEAN economies diversify their exports, the more China’s imports from these countries (or their exports to China) become resilient to changes in the relative price.
* Phi Minh Hong is ASEAN Graduate Fellow at the ASEAN Studies Centre, ISEAS – Yusof Ishak Institute and Lecturer, University of Rouen Normandie (France) and Foreign Trade University Hanoi (Vietnam).
INTRODUCTION
In the traditional trade model, the leading economy is an advanced country, and final goods are exported directly to it from developing economies. However, the growth of Global Value Chains (GVCs) has shaped a new model of North-South trade involving “Factory Asia”. This model is shaped by how the exports to advanced economies by a developing country—China—are based on South-South trade. In this pattern of trade, the effect of a change in the Chinese currency (the Renminbi, hereafter, RMB) on the exports of its suppliers deviates from popular thinking. In this regard, in addition to examining the impact of RMB fluctuations on China’s trade relations with ASEAN, this Perspective highlights the importance of export diversification carried in ASEAN economies in ensuring the resilience of China’s imports in the face of RMB fluctuations.
THE RMB AND ASEAN-CHINA TRADE
With growing participation in the GVCs, ASEAN, a part of “Factory Asia”, has become an important player in international trade. Indeed, ASEAN, as a group, is the US’s fourth largest trading partner (after Canada, Mexico and China) and the EU’s third largest trading partner outside Europe.[1] The most recent statistics point to ASEAN having surpassed the EU to become China’s largest trading partner in 2020.[2] China has in fact been ASEAN’s largest export market since 2009. That year, the value of ASEAN’s exports to China was US$195.7 billion, accounting for 14% of ASEAN’s total exports. The US was ASEAN’s second largest export destination in 2019, involving a value of US$182.6 billion which accounted for 13% of ASEAN’s total exports.[3]
China and the US are thus ASEAN’s two largest trading partners, but they follow two different patterns of North-South trade. In the traditional North-South trade pattern, ASEAN exports directly to the North (the US). The new North-South trade pattern, however, is based on South-South trade; which means that intermediate goods are exported from ASEAN to China to be processed and then exported to the rest of the world.
As shown in Figure 1, intermediate goods exports accounted for a large part of total exports from ASEAN to China (more than 80%) over the period 2012-2018. This ratio was about 55% of the exports from ASEAN to the US.
Despite their extensive exports of intermediate goods to China, export structures vary across countries depending on the processing category. Figure 2 depicts the shift in ASEAN countries’ bilateral exports to China broken down into processing and end-use categories.[4] During the period 2012-2018, there was a transition in intermediate goods exports from primary to processed goods from ASEAN economies. Some countries in the bloc recorded a significant increase in the share of exports of intermediate goods. Among them, the proportion of Vietnam’s intermediate products in overall exports increased the most, rising from 36.9% in 2012 to 72.8% in 2018 and the country accounted for the largest exports of processed intermediate goods in the bloc (39 billion USD in 2018). The second largest rise in the share of processed intermediate goods exports belonged to Cambodia, up 20% in the given period (from 22% to 42%). Although there were changes in the export structure of intermediate goods, Laos’ and Brunei’s shares of primary intermediate goods in exports remained the highest in the bloc (69.5% for Brunei, 62% for Laos). Their increasing reliance on intermediate goods implies that ASEAN countries, particularly developing economies, are deeply integrated into a complex subcontracting network. Hence, exports from those countries can be seen to be complementary to, rather than in competition with, those of China (Hooy et al., 2015).[5]
The new triangular trade structure, with China serving as an intermediary, may have repercussions on the factors affecting these participant countries’ export performance. One of them has been the impact of the Chinese currency on these economies’ exports. Through the GVCs, changes in the RMB, which affects China’s trade performance, also influence the trade performance of its suppliers.
A quick investigation gives us a broad picture of the bilateral real exchange rate and bilateral trade between China and ASEAN economies. Figure 3 depicts real RMB appreciation against the currencies of the region’s most advanced economies (Brunei, Singapore) and upper middle-income economies (Indonesia, Malaysia, The Philippines and Thailand).[6] The RMB has depreciated versus the Lao Kip but remains relatively constant against the Vietnamese Dong and the Cambodian Riel over this period. Since 2000, Vietnam’s exports to China have increased more steadily than those of other ASEAN economies (Figure 4), with the nation being the second largest exporter to China after Malaysia in 2019 (Figure 5). While bilateral exports from the least developed nations have been gradually increasing since 2010, bilateral export growth from more advanced economies appears to have been constrained.
Several studies show the conventional impact of a rising RMB on China’s exports, namely that a real appreciation in the currency implies a decrease in China’s exports. However, the impact on the import side is still being debated. From a theoretical standpoint, a strong domestic currency increases the country’s imports because of improved domestic purchasing power.
But since a large part of China’s imports is further processed into finished goods that are then exported, the conventional impact of a rising RMB on China’s imports may not be robust. Given that an appreciation of the RMB decreases China’s exports, since the latter contain value added of imported parts and components, China’s imports from its supply chain partners would decrease as well.
Phi and Tran (2020) in their work highlight the difference in the impact of importers’ exchange rates on their imports between the two North-South trade models mentioned above.[7] In the long run, while conventional wisdom persistently holds for the US (an appreciation in the real effective exchange rate of the US dollar increases the US’ imports), the reverse impact is reported in the case of China. This result coincides with previous studies that confirm this negative impact of the RMB’s appreciation on China’s imports, regardless of the fact that those imports are ordinary or processed (Garcia-Herrero and Koivu (2008), Cheung, Chinn and Fujii (2010)).[8]
For ASEAN alone, a quick regression following the work of Phi and Tran (2020) confirms the difference between the two patterns of trade. While the US’s imports from ASEAN respond highly to a change in the USD, there is only a slight change in China’s imports following a change in the RMB. Accordingly, a USD strengthened by 1% induces an increase of 1.06% in the US’s imports from ASEAN, whereas a real appreciation in the RMB by 1% decreases China’s imports from the region only by 0.35%. The latter result supports the finding of Hooy, Law and Chan (2015) on the negative impact of an appreciation of the RMB on ASEAN’s exports to China. The authors also divide disaggregated exports into categories based on usage (basic products, parts, and components) and technological levels (high-tech, medium-tech, low-tech, resource-based, primary products). According to their calculations, a positive reaction to RMB depreciation is mostly attributable to the dominance of ASEAN high-tech and medium-tech finished products exports, as well as low-tech and resource-based exports of parts and components to China. However, the degree to which ASEAN’s exports to China respond to a change in the RMB varies across disaggregated exports categories. For instance, the impact of the change in RMB value on medium-tech exports is lower than on high-tech exports. A depreciation of 1% of the RMB raises medium-tech exports by 0.66% and high-tech exports by 1.53%. At the same time, changes in the RMB appear to have little influence on ASEAN’s low-tech manufacturing, resource-based manufacturing and primary product exports.
WHEN EXPORT DIVERSIFICATION MATTERS
The results from Hooy et al. (2015) suggest that spreading suppliers’ exports across different categories of goods may affect the sensitivity of China’s imports to changes in the RMB. In other words, export diversification may affect China’s import price elasticities (the volume of imports’ response to the change in prices). As discussed above, imports from China which employ Asian-made parts and components decline as the real exchange rate rises. The impact of an RMB appreciation on Chinese commerce has been noticed in the context of GVCs. Currency appreciation diminishes China’s demand for imports from other Asian economies by decreasing China’s export production. As a result, an appreciation of the RMB might harm Asian producers of intermediate goods. Therefore, China’s policy of product diversification along with a policy of commercial partnership and cooperation with its regional partners (particularly focused on standardising tariffs in Developing Asia) is part of a premeditated strategy of resilience in the face of a real appreciation of its currency. For China’s partner economies, including ASEAN, the diversification of exports, especially bilateral exports to China, keeps these economies’ exports to China less volatile than the rate of change in the RMB. This is because each type of imported products has a different response to the change in the RMB: a high response to a real change in the RMB of high technology goods imported, for example, will be offset by the low one of medium- or low-tech manufacturing goods imported, as shown in Hooy et al. (2015)’s work.
This intuition is confirmed in the empirical analysis by Phi and Tran (2020). For lower- and middle-income countries in the Pacific Rim, including the developing ASEAN economies, China’s imports from them become less sensitive to changes in the RMB when they have a higher degree in either export diversification in destinations or bilateral export diversification with China. More specifically, the more China’s suppliers diversify their exports, the less China’s imports from those countries decrease following an appreciation of the RMB.
Most ASEAN countries maintain a high degree of export diversification, as reflected in the lower value of the Herfindhal-Hirschman index (hereafter, HHI).[9] From 1995 to 2019, the HHI of those countries ranged from 0.008 to 0.52 for products and from 0.046 to 0.45 for partners. Following the reasoning in Phi and Tran (2020), we replicate the effect of the change in the RMB on China’s imports response to the change in the RMB (China’s import price elasticities) in ASEAN countries for the given period; the results are illustrated in Figure 4. The blue areas correspond to the HHI range for ASEAN (Table A1).[10]
Overall, the response of ASEAN’s exports to a change in the RMB is minor, ranging from 0.2% to 0.4% (in absolute value) for 1% of change in the RMB. Besides, the more an ASEAN country diversifies its exports (either bilateral with China or global), the less their exports to China change following a change in the RMB. However, there is a turning point in HHI through which the effect direction would change from positive to negative. At this level of export diversification, ASEAN’s exports to China become the most “resilient” to the change in the RMB. For instance, for countries that have a bilateral HHI greater than 0.19, an appreciation in the RMB raises China’s imports from the country. This pattern follows the conventional wisdom discussed above. In most ASEAN economies (except Brunei and Laos) where the average bilateral HHI is lower than 0.19, a stronger RMB will slightly decrease ASEAN’s exports to China instead. For the HHI in products and in partners, the turning points are 0.21 and 0.38 respectively. In sum, the results highlight the importance of the export diversification strategies of ASEAN economies in making China’s imports from the region more resilient to changes in the relative price.
With the goal of promoting trade and economic growth throughout Asia and the Pacific, the Regional Comprehensive Economic Partnership (RCEP) assembles leaders from 16 countries, namely the 10 ASEAN countries as well as the six countries in the region that currently have bilateral FTAs with ASEAN. It has been argued that the RCEP will help China to consolidate its resilience in the face of a real appreciation of the RMB. Indeed, Phi and Tran (2020) find that trading with RCEP members lessens China’s import sensitivity to any change in the RER. When the Chinese currency appreciates by 1%, imports from RCEP members would decline by 0.113%, lower than imports from non-RCEP economies in the Pacific Rim area. As China plays an intermediate role in the Global Value Chains, the RCEP will make export flows from ASEAN developing economies to China and then to the final destinations smoother. On the other hand, the Covid-19 pandemic highlights the need for diversifying sourcing to help reduce supply chain volatility. This will be an opportunity for ASEAN countries to diversify not only their bilateral exports to China but also their exports to other RCEP member countries, and hence lower the impact of changes in the RMB on ASEAN’s exports.
Considering the US as an importer for comparison, we observe that the response of ASEAN’s exports to changes in the USD is higher than for China as importer, even with a higher degree of export diversification (or low HHI) of ASEAN economies (Figure 7). Spreading ASEAN’s exports across products when trading with the US helps to decrease the response of their exports to a change in the USD. However, neither ASEAN’s export diversification in products nor in partners has an impact on the US’s import price elasticities.
CONCLUSION
The expansion of product fragmentation trade in Asia has prompted a re-examination of the influence of China’s currency on the exports of its suppliers, especially from ASEAN member states (particularly the newer members) that have actively engaged in GVCs. Because a real RMB appreciation reduces Chinese exports, it lowers imports from ASEAN, rather than increase them, as conventional wisdom would suggest. When considering the United States as an importer, this effect is much smaller than the reaction of bilateral ASEAN exports to USD changes.
Besides, ASEAN’s export diversification policies have been shown to have impact on the responsiveness of their exports to RMB appreciation. Keeping a high degree of export diversification creates greater resilience to changes in relative prices for ASEAN countries’ exports to China.
ISEAS Perspective 2021/111, 20 August 2021
APPENDIX
ENDNOTES
[1] https://ustr.gov/countries-regions/southeast-asia-pacific/association-southeast-asian-nations-asean,
https://www.csis.org/analysis/us-southeast-asia-trade-relations-age-disruption,
https://ec.europa.eu/trade/policy/countries-and-regions/regions/asean/
[2] https://www.globaltimes.cn/page/202101/1212785.shtml
[3] https://ec.europa.eu/eurostat/statistics-explained/index.php?title=ASEAN-EU_-_international_trade_in_goods_statistics#ASEAN_countries_trade_in_goods_with_main_partners
[4] We use the BEC Rev. 5 classification to distinguish product categories.
[5] Hooy, C. W., Siong-Hook, L., & Tze-Haw, C. (2015). The impact of the Renminbi real exchange rate on ASEAN disaggregated exports to China. Economic Modelling, 47, 253-259.
[6] An increase in the bilateral RER indicates an appreciation in the Renminbi. In Figure 3, we excluded Myanmar’s currency for better scale. The RER of Myanmar kyat is represented in Figure A1. The kyat was devalued largely in 2012, when the foreign exchange rate reforms occurred. The official pegging of Myanmar’s currency to the special drawing right (SDR) was annulled in April 2012. The Central Bank of Myanmar then introduced a managed floating exchange rate system. The previous peg is the reason why the kyat was overvalued before 2012 (https://www.imf.org/external/pubs/ft/scr/2013/cr1313.pdf).
[7] Minh Hong, P., & Thi Anh-Dao, T. (2020). Should I stay or should I go? The role of the renminbi in trade partnerships in the Asia-Pacific region. Post-Communist Economies, 32(8), 1062-1088.
[8] Herrero, A. G., & Koivu, T. (2008). China’s exchange rate policy and Asian trade. Économie internationale, (4), 53-92.
Cheung, Y. W., Chinn, M. D., Fujii, E., & Frankel, J. (2010). 7. China’s Current Account and Exchange Rate (pp. 231-278). University of Chicago Press.
[9] /articles-commentaries/iseas-perspective/2021-80-the-importance-of-export-diversification-for-developing-asean-economies-by-phi-minh-hong/
[10] For bilateral export diversification, we represent the HHI range from 0.02 to 0.6 instead of from 0.02 to 1 because only in the case of Brunei does bilateral HHI approximate to 1 while other ASEAN economies have relatively low bilateral HHI.
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