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.