New Evidence on Export Price Elasticity from China and Six OECD Countries

• Author: Graziella Bonanno,Francesco Aiello,Alessia Via
• DOI: http://doi.org/10.1111/cwe.12136
• Date: 01 November 2015
• Published date: 01 November 2015

56 China & World Economy / 56–78, Vol. 23, No. 6, 2015

©2015 Institute of World Economics and Politics, Chinese Academy of Social Sciences

New Evidence on Export Price Elasticity from

China and Six OECD Countries

Francesco Aiello, Graziella Bonanno, Alessia Via*

Abstract

This paper provides new evidence on export price elasticities by analyzing the cases of

China, France, Germany, Italy, Japan, UK and the USA over the period 1990 –2012.

Estimates have been made using panel data techniques for non-stationary data. After

demonstrating that long-run relationships are stable to any structural break, it is found that

exports are significantly determined by foreign demand, with long-run income elasticity

significantly higher than unity for China, Japan, Germany, the UK and the USA. Conversely,

exports are price inelastic for most of the countries in the sample, in both the long run and

the short run. The exception is France, whose export price elasticity is lower (higher) than

unity in the short run (long run).

Key words: competitive devaluation, currency wars, export price elasticity, panel data

JEL codes: C23, F10, F17, F37, P33

I. Introduction

Analysis of trade flows reveals many cases of national current account imbalances. The

USA was a net exporter until 1975, when its trade surplus accounted for 1.07 percent of its

GDP; it then experienced rapidly growing trade deficits and since the 1990s it has been the

world’s largest debtor. In 2000 Germany had a trade deficit of 1.83 percent of its GDP, but

became a net-exporter by 2013, with a trade surplus of 7.58 percent of its GDP. China ran a

trade surplus averaging 4.24 percent of its GDP from 1998 to 2013, peaking at approximately

10 percent in 2007.

Sizable and persistent national trade surpluses in large economies generate global

imbalances and tensions in world markets: there is serious concern over exporters managing

*Francesco Aiello, Professor, Department of Economics, Statistics and Finance, University of Calabria,

Calabria, Italy. Email: francesco.aiello@unical.it; Graziella Bonanno, Post-Doc Researcher, Department

of Economics, Statistics and Finance, University of Calabria, Calabria, Italy. Email: graziella.

bonanno@unical.it; Alessia Via, Post-Doc Student, Liaison Office, University of Calabria, Calabria, Italy.

Email: alessia.via@unical.it.

57

New Evidence on Export Price Elasticity

©2015 Institute of World Economics and Politics, Chinese Academy of Social Sciences

their currency to gain from competitive devaluations. Disputes over national interests can

turn into currency wars, when trading partners accuse each other of unfair practices in

manipulating their exchange rates in order to boost exports and curb imports.

Although the most prominent recent case is that of China, Germany, Japan and the UK

have also manipulated their real exchange rates. Japan and the UK used quantitative easing

to counter the current recession (Joyce et al., 2011; Gagnon, 2013), and, according to the

US Treasury, Germany’s low level of investment and high savings rate contributed to the

eurozone crisis, which is characterized by increasing trade troubles for the EU periphery

and huge surpluses for Germany. Following this, one would expect that controlling exchange

rates is a feasible policy to improve trade balances. In other words, tensions in currency

markets are expected if devaluations lead to substantial increases in exports. In short,

exports are expected to be price elastic. This expectation, however, is not empirically

supported, with price elasticity found in many studies to be less than unity.

While this heterogeneity of results casts doubt on the effect of a real devaluation, it

also indicates that price competitiveness remains a controversial and intriguing issue in

international trade (see e.g. Orcutt, 1950; Houthakker and Magee, 1969; Kravis and Lipsey,

1978). There are surveys of initial papers in Stern et al. (1976), Goldstein and Khan (1985)

and Sawyer and Sprinkle (1996). Although these review papers demonstrate the wide range

of price elasticities, it is noteworthy that the picture does not change in more recent studies.

Limiting attention to price elasticities of aggregate trade flows, several authors show that

exports are price inelastic. Anaraki (2014) uses a Keynesian model and quarterly data over

the 2001–2010 period and finds that a 10-percent euro devaluation against the major

currencies (the yuan, the dollar and the yen) would increase the eurozone ’s exports to

China by 3.4 percent, to the USA by 2.4 percent and to Japan by 1.9 percent. Algieri (2011)

reports that the price elasticities of the exports of France, Italy, Japan, the Netherlands,

Spain, the UK and the USA are rather small (in the range of 0.3/0.8) over the period 1978 –

2009. Similarly, the export price elasticity of eurozone countries is found to be low in

Bayoumi et al. (2011) and in Chen et al. (2012), at 0.6 and 0.46, respectively. Ketenci and Uz

(2011) study the EU bilateral trade flows over 1980–2007 and find an export price elasticity

ranging in the 0.08/0.64 interval. The price elasticity of Germany ’s exports is reported as

0.6 in Thorbecke and Kato (2012). Thorbecke and Kato (2012) focus on Japanese exports to

17 partners over the period 1988–2009 and find that exports are price inelastic, although a

unitary long-run elasticity is found for consumption products. Crane et al. (2007) find that

during the 1981–2006 period the price elasticity is low for Italy (0.7), Japan (0.34) and the

USA (0.6). Yao et al. (2013) look at total Chinese exports from 1992 to 2006 and, even after

controlling for an increase in product variety, they find a short-run price elasticity of 0.65.

Dezeure and Teixeira (2014) argue that in spite of depreciation of the pound, the weak