Asymmetric long-run effect of exchange rate on bilateral trade balance between USA and China
| DOI | https://doi.org/10.1108/JCEFTS-03-2022-0020 |
| Published date | 15 July 2022 |
| Date | 15 July 2022 |
| Pages | 85-98 |
| Subject Matter | Economics,International economics |
| Author | Yongqing Wang |
Asymmetric long-run effect of
exchange rate on bilateral trade
balance between USA and China
Yongqing Wang
College of General Studies, University of Wisconsin-Milwaukee,
Waukesha Campus, Waukesha, Wisconsin, USA
Abstract
Purpose –This paper aims to investigate asymmetric long-run effects of bilateral exchange rate on US
trade imbalances with China and to examine if the effects are the same under China’sfixed and managed
floatingexchange rate systems.
Design/methodology/approach –The authors estimate both linear autoregressive distributed lag
(ARDL) model assuming symmetric effect and nonlinear ARDL model assuming asymmetric effect of
exchange rate on US trade deficitwith China. The authors use data from 1994Q1 to 2005Q2 (under Chinese
fixed exchangerate system), from 2005Q3 to 2021Q3 (under Chinese managedfloating exchange rate regime),
and from 1994Q1 to 2021Q3 (overalldata).
Findings –The Chow test indicates 2005Q3 is a structure break point. Further, the results suggest the
effects ofbilateral exchange rate on US trade deficitwith China are not the same under different exchange rate
systems. The asymmetric long-run effect of bilateral exchangerate does exist. The results also demonstrate
the depreciationof Chinese currency will not significantly affect US trade imbalanceswith China.
Research limitations/implications –Based on the results, the Chinese Governmentshould embrace a
more transparentand flexible exchange rate system. It will notsignificantly hurt Chinese trade balance, but it
will help to reduce the tensionbetween the USA and China.
Originality/value –All previous literature (excepttwo papers) related to the effect of Chinese exchange
rate on US trade deficit with China assume the effect is symmetric, and all (except one) use data under
different Chinese exchange rate systems. To the best of the authors’knowledge, this is the first paper that
studies the possible asymmetriclong-run effect of bilateral exchange rate under different Chineseexchange
rate regimes.
Keywords US trade balance with China, Exchange rate, ARDL model, Nonlinear ARDL model,
Asymmetric effect
Paper type Research paper
1. Introduction
China’s exchange rate systemhas drawn a lot of attention and criticism. To someof China’s
trading partners, especially to the USA, the ChineseGovernment intentionally undervalues
its currency, Yuan, to make its exports cheaper. The unfair advantage of Chinese exports
leads to the huge amount of trade imbalances between the USA and China. The trade
imbalances have increased significantly, especially after 2000. Please see the following
Figure 1.
Unlike most countries, the Chinese exchange rate is still not fully determined by the
market forces, although it has undergone some reforms since China started its economic
reform in 1978. China had a floatingexchange rate from 1978 to 1993. Then China adopted a
fixed exchange rate in 1994, and Yuan was pegged to the US dollar at about 8.28 Yuan per
dollar for more than a decade. In July 2005,China abolished the fixed exchange rate system
Asymmetric
long-run effect
of exchange
rate
85
Journalof Chinese Economic and
ForeignTrade Studies
Vol.16 No. 2, 2023
pp. 85-98
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-03-2022-0020
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