Working Paper No. 12-12

Energy Use in US Manufacturing and INcraesed Imports from China
Kyungsoo Oh
November 2012

ABSTRACT

This study is motivated by recent trends in the US economy which seem inconsistent with the prediction of traditional Heckscher-Ohlin trade theory. With increased imports from China, this theory tells us that the structure US manufacturing should move toward more energy- intensive industries and as a result, energy use in the US industries should increase. However, energy consumption by US manufacturers has declined by 3.8% from 2002 to 2006 and the real value of manufacturing output has increased about 10% for the same period. To investigate the effect of trade with China on energy use in US manufacturing, I modify the H-O model by adding an energy tax. This model predicts that the energy tax magnifes the negative effect on energy use caused by factor substitution between and within the US manufacturing industries. Therefore, even though the output effect is still positive in energy-intensive industries, the overall effect of increasing imports from China can be negative. To help understand the magnitude of the energy-use response to an increased Chinese import penetration, I construct a computable general-equilibrium (CGE) model of the US economy using the US input-output table for base
year 2005. Specifcally, what level of energy tax would offset the increasing effect of trade with China on energy use? I show that increasing imports from China combined with an energy tax can produce outcomes consistent with the actual data: decreasing energy consumption yet increasing output. In particular, total energy use in the manufacturing sector can fall at the same time as US welfare increases due to its improved terms of trade. This result tells us that an energy tax that offsets the otherwise energy-increasing effect of Chinese import penetration is likely small and is unlikely to reduce welfare. I numerically estimate these ffects using US manufacturing industry-level panel data of 1997 to 2005. I also decompose the effect of increasing imports from China on energy use of US manufacturing into a factor substitution effect and an output scale effect. Because import penetration may be endogenous, I instrument for Chinese import penetration using Chinese share of world trade. My results indicate that overall, increasing imports from China raise consumption of fuel and electricity. As in the simulation model, the marginal effect of Chinese import penetration is small, about 0.05% to 0.08%, but statistically significant. Interestingly, the directions of the factor substitution effects on fuel and electricity are opposite. Increasing imports from China causes a decrease in the factor ratio of fuel over labor, but an increase of electricity over labor. This result suggests that as a result of increasing imports from China, electricity replaces labor, unlike fuel.

 

JEL classification: F18, Q4, Q56
Keywords: Energy Use, US Manufacturing, Imports, China

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