China’s impact on pass-through to US import prices

Pages55-72
Publication Date04 February 2019
DOIhttps://doi.org/10.1108/JCEFTS-11-2018-0043
AuthorMichael Malenbaum
SubjectEconomics,International economics
Chinas impact on pass-through to
US import prices
Michael Malenbaum
Department of Economics, Iona College, New Rochelle, New York, USA
Abstract
Purpose This paper aims to analyze the marked decline in exchange rate pass-through to US import
prices in the early 2000s focusing on the increasedrole of China as a trade partner. In particular, the research
focuses on the impact of an exporter with a xedexchange rate having large market shares of a particular
importingcountry.
Design/methodology/approach The study uses highly disaggregated US import data and rolling
regressionsto calculate quarterly pass-through estimatesfor specic goods from every exporter.This leads to
a total of over 1.7 million pass-through coefcients. The second stage compares these pass-through
coefcientswith Chinas share of US import market for that particulargood and time.
Findings The paper shows that as Chinasmarket share for specic goods grows, pass-through rates of
imports from other countriesfalls. Pass-through rates remain relatively stable forgoods that China does not
export to the USA or goods for which Chinas share of US imports stays constant. This relationship is
strongerwhen the dollar decreases in value, further suggesting that pressurefrom China forces competitors to
maintainstable prices.
Originality/value This paper is unique in its use of highly disaggregated data on US imports. While
many analyses of exchangerate pass-through focus on overall levels or generalgoods, this work uses import
data at the 10-digit HTS code level. Therefore, the ndings are more detailed in showing how Chinas
increasedpresence in the US market inuences prices of imports from other countries.
Keywords International trade, Competition
Paper type Research paper
1. Introduction
From 1991 through 2005, the total annual value of imports to the USA from China
increased by a factor of nearly 11.5. While total imports grew dramatically from all
countries during this time, Chinas share of the US import market rose from just over 4
per cent in 1991 to nearly 13.5 per cent in 2005. Chinasriseasatradepartnerwiththe
USA coincides with a period in which exchange rate pass-through to US imports
declined, and pass-through to imports from China was substantially lower than from any
other major country. The primary objectives of this work are to examine these trends and
show the impact of Chinas increased presence in the market on exchange rate pass-
through to US import prices.
One consistent theme in the recent literature on exchange rate pass-through is the
empirical result that pass-through to import prices in the USA declined dramatically over
the last part of the twentieth century. Estimatesfor pass-through rates in the 1980s typically
fall between 0.6 and 0.8, while similar measurements in the early 2000s have pass-through
coefcients between 0.1 and 0.3[1]. Some recent work looks at the increased presence of
China as a trade partner for the US as being potentially responsible for the drop in pass-
through rates[2]. Thelogic behind this theory is that as China became more prominentin the
JEL classication F10, F15
US import
prices
55
Journalof Chinese Economic and
ForeignTrade Studies
Vol.12 No. 1, 2019
pp. 55-72
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-11-2018-0043
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1754-4408.htm
USAs import market,the increased competition, or even the threat of increased competition,
forced rms in other exportingcountries to temper responses to exchange rate movements.
By a variety of measures, the proportionof US imports originating from China increased
dramatically in the late 1990s and early2000s. Chinas rise occurred through increasing the
volume of trade in established goods, as well as introducing new goods to the market. The
clear growth can be seen across a variety of types of goods, but most notably in larger
categories of imports. In additionto the breadth of trade, China also increased its dominance
of the markets for individual goodsby becoming the top exporter to the USA for more goods
than any other country. Chinas rise as an exporter to the USA coincidedwith the period of
declining pass-through rates in all US imports. This also overlapped with a period (1994-
2005) during which Chinamaintained a pure peg of the yuan to the US dollar.
One common thread in the studies of decliningpass-through is the focus on pass-through
rates to import prices as a whole or by broad categories of goods. In this paper, I use more
detailed data on imports to examine this decline and tie it to Chinas increased presence in
the US market. At the level of individual goods, pass-through rates tend to be marginally
lower when China competes than when it does not, a relationship that becomes stronger
when China is the number one exporterof a good to the US. More signicantly, pass-through
tends to be lower as Chinas share of the US import market increases. Additionally, I nd
more stable pass-throughover time for goods that China does not ship to the USA. Finally, I
show that the categories of imports with the largestincreases in Chinas share of the market
tend to be those where pass-through drops the most.By showing the extent to which China
has come to dominate the US import marketand tying it to overall declines in pass-through,
this paper shows the impactthat Chinese exporters have on their competitors.
2. A theoretical example
The general theoreticalframework for this paper derives from Atkeson and Burstein (2008),
which develops a model of oligopolistic competition relating prices and market shares of
competing rms with constant elasticities of substitution across both goods sectors of
goods. Here, I consider eachgood to be a sector, with each exporting countrys version being
what Atkeson and Burstein call a good. With this framework,the dollar price of imports of
good jfrom exporter Acan be expressedas a markup to marginal costs[3] and the exchange
rate[4], where markup is a function of A0s share (S
j,A
) of the host countrys import market
for j:
Pj;A¼
x
þSj;A
z

1ERAMCj;A:(1)
The constants
x
and
z
are functions of the constant elasticities of substitution from one
countrys versionof a good to anothers(
r
) and from one good to another (
h
).
To show the effect of Chinas market share on the pass-throughrates of its competitors,
consider two goods (gand h) imported by a host country from rms in the same Nexporters
(N3). Both goods have the same elasticities of substitution and everyexporters marginal
costs of production are the same forthe two goods. Call three of the exporters A,Band Cand
let Chave a xed exchange rate,while the remaining N1 exporters have oating exchange
rates. For good g, exporter Bhas an nper cent share of the market while Chas a share of
mper cent (m>n). The other N2 exporters have varyingsized shares of the market for g
to make the total sum to 100 per cent. For good h, each exporter(including A) has the same
share as it had for g, except Bhas an mper cent share and Chas an nper cent share[5].
Consider a kpercent change in the hostcountrys currency with respect to all currencies
with oating exchange rates. This implies that the exchange rates of the N1oating
JCEFTS
12,1
56

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