Rapid growth in imports of merchandise from China over the past decade has posed a challenge for competing US manufacturers. Some observers believe that the Chinese government has contributed to growth in US imports by maintaining an undervalued currency, and there have been calls for China to revalue its currency, the renminbi—that is, to raise its value (or allow it to rise) relative to the dollar—as a way to level the playing field for US manufacturers.

The value of Chinese imports to the US quintupled between 1997 and 2007, rising from $65 billion to $342 billion. 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.

In a paper released last week, the US Congressional Budget Office (CBO) examines two important determinants of how appreciation of the renminbi against the dollar might affect competition in  markets.

The first determinant is the portion of the value of Chinese exports that is produced in China—that is, the value of the exports minus the value of the imported inputs (such as parts and raw materials) used to produce them. That portion is often called the domestic value added, or the domestic content. A revaluation of the renminbi would affect the dollar price of only the domestic content of China’s exports. It would not affect the portion of the exports’ value attributable to the cost of imported inputs—often called the foreign content—unless the countries that supply those inputs allowed their currencies to rise in value as well.

The second determinant is the degree to which Chinese exports to the United States compete with other countries’ exports rather than with the products of  manufacturers. In general, a decline in  imports from China would be offset to some extent by an increase (or more rapid growth) in imports from elsewhere.

In brief, CBO finds the following:

• A review of the relevant literature indicates that the average domestic value added of Chinese exports to the United States is probably between 35 percent and 55 percent. As a result, a 20 percent revaluation of the renminbi (for example) would cause the average price of imports from China to rise by roughly 7 percent to 11 percent if Chinese exporters continued to fully pass through their costs and previous rates of profit after the revaluation. The increase would be smaller if the exporters reduced their profit margins to maintain their share of the market, as firms often do when their currencies appreciate. The increase could be larger if the other countries that supply inputs to China’s exports allowed their own currencies to appreciate in response to the Chinese revaluation.
• By CBO’s estimate, roughly one-third of the increase in the share of  imports from China from 1998 through 2005 was offset by reductions in the shares of imports from the rest of the world. However, slight variations in CBO’s estimating methodology lead to meaningful differences in the estimate; thus, the actual offset could be somewhat higher or lower. CBO’s estimate is considerably lower than the 75 percent to 90 percent reported in two previous studies for periods between 1988 and 1997. The lower value probably reflects, at least in part, a decline in the offset over time as China has developed economically and technologically and its exports have become more similar to the output of  manufacturers and less similar to  imports from elsewhere. The lower value may also stem in part from differences in methodology.