The impact of the yuan‐dollar exchange rate on Mexican manufacturing exports to the US: A cointegration approach

• Date: 01 March 2018
• DOI: http://doi.org/10.1111/twec.12542
• Author: Víctor Cuevas
• Published date: 01 March 2018

ORIGINAL ARTICLE

The impact of the yuan-dollar exchange rate on

Mexican manufacturing exports to the US: A

cointegration approach

V



ıctor Cuevas

Department of Economics, Universidad Aut

onoma Metropolitana, Mexico city, Mexico

1

|

INTRODUCTION

The purpose of this paper is to investigate the long-term effects of several key variables on Mexi-

can exports of manufactures to the US market. In particular, this research lends some substance to

the view that the yuan-dollar real exchange rate has a bearing on Mexican exports to its major

trading partner (Gallagher, Moreno-Brid, & Porzecanski, 2008, p. 1377). This research makes use

of three econometric methodologies and three time intervals, thereby providing empirical evidence

that is fairly consistent across estimation periods and econometric techniques. The use of three

time intervals is due to the fact that, as of January 2007, the National Institute of Statistics and

Geography of Mexico broadened the coverage of the statistical data concerning the manufacturing

industry, with the aim of incorporating the maquiladora exporting establishments. Thus, starting at

this date the standard manufacturing data involve 240 types of economic activity on the basis of

the North American Industrial Classification System 2007. In contrast, the old data base encom-

passes only 205 types of economic activity.

Such a change in the coverage of official statistics for the manufacturing sector makes it conve-

nient to carry out a comparative empirical analysis over three different periods: (i) the first period

relies on the old data base and runs from January 1994 to December 2008, when the old series

was discontinued; (ii) the second period is from January 2007 to July 2016; and (iii) the third per-

iod is built using a simple data chaining technique, which allows one to cover from January 1994

to July 2016. Put differently, given that the old and new time series overlap over the period 2007–

08, that they are closely related (i.e., the old time series is a significant subset of the new one) and

are measured at the same frequency, it is possible to extend the new time series backward in levels

by way of replicating the growth path of the old time series. This data chaining procedure is

known as retropolation and, as shall be seen below, it is applied to four of the ten variables of the

model. More importantly, the use of longer historical series increases the robustness of the empiri-

cal findings.

Furthermore, three econometric methodologies are used to estimate the long-run elasticities:

fully modified ordinary least squares (FMOLS), canonical cointegrating regression (CCR) and

dynamic OLS (DOLS). Regardless of the estimation period, these three techniques yield supportive

evidence for a long-run equilibrium relationship between Mexican manufacturing exports to the

DOI: 10.1111/twec.12542

866

|

©2017 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2018;41:866–883.

US and the following variables: the Chinese yuan-US dollar real exchange rate, the Mexican peso-

US dollar real exchange rate, labour productivity and manufacturing earnings. External demand, as

measured by total US imports of goods minus Mexican exports of goods to the US, also plays an

important role in the estimated cointegrating equations.

The behavioural relationships are interesting on at least two grounds. First, a real depreciati on

of the peso reduces rather than increases manufacturing exports. The conventional wisdom is that

exchange rate depreciation stimulates exports by lowering their price abroad (i.e., their foreign-cur-

rency price). This is the demand-side effect of real currency depreciation. Nonetheless, the high

import content of Mexican manufacturing exports gives rise to a strong supply-side effect of oppo-

site sign, given that real depreciation of the peso increases the domestic-currency price of imported

intermediate inputs, capital stock and technology. In such a context, the evidence suggests that the

supply-side effect of real exchange rate depreciation dominates the demand-side effect in the long

run, so that manufacturing exports fall. This finding reflects the overwhelming reliance of the

export-oriented manufacturing industry on foreign suppliers of intermediate inputs (in addition to

capital stock and technology), which makes export production costs exceedingly sensitive to

exchange rate volatility. As will be argued below, Mexico’s growing private sector external debt

could be another contributing factor to the negative effect of currency depreciation on manufactur-

ing exports.

Second, a real depreciation of the yuan vis-

a-vis the US dollar reduces Mexican manufacturing

exports to the US, presumably leading to a loss in market share to China. By providing estimates

of the long-term effect of Chinese exchange rate policy on Mexican manufacturing exports to the

US, this research contributes to fill a gap in the current empirical literature. Lastly, labour produc-

tivity and external demand show a strong positive relationship with manufacturing exports,

whereas manufacturing earnings bear a negative relationship. Along these lines, the econom etric

estimates suggest that a real depreciation of the yuan-dollar exchange rate or a declining trend in

external demand for Mexican manufacturing products could, to some extent, be offset by means of

increasing labour productivity. This evidence reflects another fundamental problem of the Mexican

economy: an insufficient investment in high-quality formal instruction and in proper on and off-

the-job training programmes, which gives rise to severe bottleneck points for faster labour produc-

tivity growth.

The remaining of this paper is organised as follows. Section 2 is a market share analysis show-

ing the extent to which Mexican manufactures have been losing ground to Chinese manufactures

in the US market. Section 3 is an overview of the recent empirical literature on determinants of

manufacturing exports. Section 4 describes the model specification and the data set, in addition to

performing the integration analysis. Section 5 conducts the cointegration tests, estimates the long-

term equations and provides an interpretation of the econometric evidence. The last section outlines

the main empirical findings and examines their economic policy implications.

2

|

MEXICO AND CHINA: A MARKET SHARE ANALYSIS

During the 2007–15 period, 74.1% of Mexican exports of manufactures went to the US.

1

This fig-

ure illustrates the extent to which Mexico’s manufacturing industry relies on the US market, where

the Mexican position has been seriously challenged by China in recent years. Figure 1 reflects the

1

Source: Own estimation based on data from the National Institute of Statistics and Geography of Mexico and the Interna-

tional Trade Administration database of the US Department of Commerce.

CUEVAS

|

867