How Sensitive are Latin American Exports to Chinese Competition in the U.S. Market?

Authors: J. Ernesto López-Córdova, Alejandro Micco, and Danielken Molina
Source: Economía (Journal of the Latin American and Caribbean Economic Association), Fall 2007

In this paper we estimate the elasticity of substitution of US imports using detailed trade data over the 1990-2003 period. We use a two-stage least squares framework in order to identify the elasticity parameter of interest. Our elasticity estimates for aggregate imports are in line with those of other recent studies. Moreover, our methodology allows us to provide elasticity estimates at the sectoral level. We use the elasticity estimates to assess the extent to which Latin American and Chinese goods compete in the U.S. market by providing forecasts of how alternative policy scenarios may affect exports to the United States. We consider the following scenarios: (i) currency revaluation in China; (ii) elimination of US tariffs on Latin American exports under a hemispheric free trade agreement; and (iii) the elimination of quotas on apparel and textile exports under the Multi-Fiber Agreement. We find that a 20-percent appreciation of the renminbi reduces Chinese exports to the United States by a fifth, although since other regions increase sales to that market (0.5 percent for Latin America), US imports decline by only 1.7 percent. Hemispheric free trade would increase Latin America's exports to the United States by around three percent. The removal of MFA quotas would lead to a sharp increase in Chinese sales to the United States (40 percent), but Latin America would see its share of the US market decline by around 2 percent (2.5 percentage points). China's gains would come mainly at the expense of other regions of the world.

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