China‐Germany commodity trade and the S‐curve
| Date | 03 February 2012 |
| Published date | 03 February 2012 |
| Pages | 20-28 |
| DOI | https://doi.org/10.1108/17544401211197931 |
| Author | Mohsen Bahmani‐Oskooee,Dan Xi |
| Subject Matter | Economics |
China-Germany commodity trade
and the S-curve
Mohsen Bahmani-Oskooee and Dan Xi
Department of Economics, University of Milwaukee, Milwaukee, Wisconsin, USA
Abstract
Purpose – Impact of currency depreciation or devaluation on the trade balance is not instantaneous.
Indeed, because of adjustment lags favorable effects of depreciation is only realized in the future. This
short-run dynamics of the trade balance is summarized by the S-Curve phenomenon. The purpose of
this paper is to test this phenomenon by using commodity level data between China and Germany.
Design/methodology/approach – The methodology is based on cross-correlation function.
Findings – Out of 62 industries studied, only 22 support the S-Curve or enjoy improvement in their
trade balance in the future. The list included small and large industries as well as durable and
non-durable goods.
Originality/value – No study in the literature has considered commodity level trade between China
and Germany.
Keywords China, Germany,Commodity markets, Depreciation,Foreign exchange, Trade balances,
S-Curve, Industrydata
Paper type Research paper
I. Introduction
Deterioration of the US trade balance in 1971 despite devaluation of the dollar initiated a
debate, discussion, and ultimately theoretical developments aimed at explaining as to
why devaluation could worsen a deteriorating trade balance first and improves it later,
a pattern that is known as the J-Curve phenomenon in the literature. Magee (1973)
basically attributed the phenomenon to adjustment lags from the time of currency
devaluation until change in trade flows. Subsequent studies adhered to regression
analysis to test the J-Curve phenomenon by specifying and estimating a reduced form
trade balance model and distinguishing the short-run effects of devaluation or
depreciation from its long-run effects. In 1994, Backus et al. (1994) introduced yet another
approach to infer the short-run effects of terms of trade deterioration or real depreciation
on the trade balance. Rather than engaging in regression analysis, they concentrated on
correlation coefficient between the trade balance and real exchange rate. They
demonstrated theoretically and empirically that the cross-correlation coefficients
between current exchange rate and future values of the trade balance are positive.
However, the same coefficients between past values of the trade balance and current
exchange rate are negative. Plot of these cross-correlation coefficients against the values
of the lags and leads resulted in a pattern that resembled the letter S, hence the S-Curve.
Both theJ-Curve and the S-Curve literature have recentlybeen reviewed extensively by
Bahmani-Oskooee and Hegerty(2010) where they classified all studies into three groups.
The first group includes studies thatuse aggregate trade flows between one country and
rest of the world to detect the either curve. Examples include Bahmani-Oskooee (1985)
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1754-4408.htm
JEL classification – F31
JCEFTS
5,1
20
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 5 No. 1, 2012
pp. 20-28
qEmerald Group Publishing Limited
1754-4408
DOI 10.1108/17544401211197931
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