Industry‐Level Competitiveness, Productivity and Effective Exchange Rates in East Asia

Abstract

In this paper, we investigate export competitiveness based on unit labor costs (ULC) and nominal effective exchange rates for Japan, China and Korea for 12 manufacturing industries at the two-digit International Standard Industrial Classification level for the period 2001-2009. Japan's ULC are relatively stable or declining in most industries, while Korea's ULC show an upward trend in many industries, with the electrical and optical equipment industry being a major exception. China's ULC are declining in most industries. Evaluating ULC on a foreign currencies basis, Japan's ULC increased rapidly during the period of yen appreciation, suggesting that Japan's cost reduction efforts were more than offset by the appreciation of the yen. The results of our empirical analysis suggest that both increases in ULC and appreciation of the home currency reduce exports by raising the home country's relative prices. The negative impact of ULC is largest for China, while it is negligible for Japan. However, the negative impact of nominal effective exchange rates is largest for Japan. Moreover, the negative impact of ULC tends to be larger for machinery-related industries, suggesting that cost competitiveness is particularly important in these industries.

Global Value Chains and Effective Exchange Rates at the Country‐Sector Level

“…Our attempt to incorporate sector‐level price indices and build sector‐ level exchange rates has a precedent in the work of Bennett and Zarnic (), Sato et al. (), Ito and Shimizu (), and Goldberg (). However, their work does not incorporate trade in intermediate goods or uses a weighting matrix that ignores intersectoral linkages.…”

“…They, however, do not allow for sectoral heterogeneity, which we find to be a critical feature in determining patterns in competitiveness, and do not consider REERs at the sector level. 4 Our attempt to incorporate sector-level price indices and build sector-level exchange rates has a precedent in the work of Bennett and Zarnic (2009), Sato et al (2013), Ito and Shimizu (2015), and Goldberg (2004). However, their work does not incorporate trade in intermediate goods or uses a weighting matrix that ignores intersectoral linkages.…”

Gross Exports Versus Value-Added Exports: Determinants and Policy Implications for Manufacturing Sectors in Selected CEE Countries

“…According to the literature overview by Turner and Van't Dack (1993) and the literature analysis by Turner and Golub (1997), in industrialized economies unit labour costs (ULCs) in manufacturing seem to be the best single measure of cost/price advantages of countries. There are myriads of examples of studies on the negative relationship between the level of unit labour costs and the intensity of exports (Ito and Shimizu, 2013;Guerrieri and Cafferelli, 2012), but sometimes, especially in countries with low levels of ULC, exports can increase even when ULCs increase (Lewney, 2011).…”

Global Value Chains and Effective Exchange Rates at the Country-Sector Level

“…They however do not allow for sectoral heterogeneity which we find to be a critical feature in determining patterns in competitiveness, and do not consider REERs at the sector level. 4 Our attempt to incorporate sector level price indices and build sector level exchange rates has a precedent in the work of Bennett and Zarnic (2009), Sato et al (2013), Ito and Shimizu (2015), and . However, their work does not incorporate trade in intermediate goods and uses an IMF-like weighting matrix.…”