The Impact of an Appreciation of the Chinese Yuan on the Global Trade

Multiple currencies are a troublesome issue in a multi-country model. The GTAP model circumvents this problem by converting values for each country into US dollars. This approach simplifies the model greatly, but it also ignores the role of exchange rates. One may argue that real exchange rates can be calculated based on the bilateral trade volume, but this calculation sheds no light on the predominant influence of exchange rates on international trade, which was demonstrated vividly by the Asian Financial Crisis in 1997, more recently, the GFC, and the Chinese government’s apparent determination to keep its exchange rates low even under pressure from the US government. To illustrate the effects of exchange rate policies (e.g., appreciation of the Chinese yuan), the authors add exchange rates into the GTAP model. In doing so, the model technically allows different currencies in different countries while the global aggregation is achieved by converting different current currencies into a global currency (e.g., $US). The simulation results show that a 10% appreciation of the Chinese yuan has a significant impact on China and its major trade partners. Quite unexpectedly, China will gain from a stronger RMB. With a 10% appreciation of RMB, China will increase its imports by 1.199%, exports by 0.522%, terms of trade by 10.263%, and real GDP by 0.02%. Although its income will decrease by 9.337%, real income actually rises by 0.663% if measured in US dollars. The effects of an appreciation of RMB on other countries are mixed and depend on their trade relationship with China. Exporters to China are likely to be better off, but the countries competing with China in the world market are expected to lose. At the sectoral level, all agricultural sectors and manufacturing sectors in China will be worse off, with the exception of animal production and electronics manufacturing. All service sectors in China would benefit from a stronger RMB. The sectoral effects on other countries are, by and large, opposite to that of China. Payments to factors are expected to reduce significantly in China, but would be marginally positive or negative if measured in a global currency. They are positive for all other countries, with the exception of the US, where payments to capital and labour will drop insignificantly.