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

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