Exchange-rate risk and UK-China trade: evidence from 47 industries
| Published date | 28 January 2014 |
| DOI | https://doi.org/10.1108/JCEFTS-04-2013-0011 |
| Pages | 2-17 |
| Date | 28 January 2014 |
| Author | Mohsen Bahmani-Oskooee,Scott Hegerty,Ruixin Zhang |
| Subject Matter | Economics,International economics |
Exchange-rate risk and UK-China
trade: evidence from 47 industries
Mohsen Bahmani-Oskooee
Center for Research on International Economics,
University of Wisconsin-Milwaukee, Milwaukee, Wisconsin, USA
Scott Hegerty
Department of Economics, Northeastern Illinois University,
Chicago, Illinois, USA, and
Ruixin Zhang
Department of Economics, University of Wisconsin-Milwaukee,
Milwaukee, Wisconsin, USA
Abstract
Purpose – Recent years have seen a rapid expansion of studies that examine the effects of
exchange-rate risk on bilateral exports and importsfor specific industries. Since the underlying theory is
ambiguous, each case must be studied individually. This paper considers British trade with China, for 47
types of product, over the period from 1978 to 2010. Consistent with the underlying theory, cointegration
analysis shows that most industries register no effect due to volatility in the long run, while some trade
flows are reduced and a handful are even increased. An analysis of industry characteristics suggests
that while the type of good might play little role on an industry’s specific results, a product’s trade share
does. This is the case for UK imports of Chinese goods, perhaps because large Chinese exporters are able
to successfully hedge against exchange-rate risk. The paper aims to discuss these issues.
Design/methodology/approach – The method is based on bounds testing approach to
cointegration and error-correction modeling.
Findings – The paper arrives at two key conclusions. First, as has been shown previously for other
country pairs, most industries demonstrate no long-run response to exchange-rate volatility. A fraction
of industries are affected, and most of these effects are negative.
Research limitations/implications – This research pertains to the case of industry trade between
the UK and China only.
Practical implications – Thepaperidentifies industriesthatare affected byexchange rateuncertainty.
Originality/value – No study has looked at the impact of exchange rate uncertainty on the trade
flows between China and the UK at commodity level.
Keywords Commodity trade,Exchange rate volatility, UK-China trade
Paper type Research paper
I. Introduction
More than 40 years since the breakdown of the Bretton Woods international system,
freely floating exchange rates have been shown not to have ushered in the era of
worldwide macroeconomic instability that might have been feared in 1973. Currency
risk has nevertheless been shown to have had some impact on global trade flows. The
evidence suggests that this volatility has not always reduced bilateral exports or
imports as might be expected; in fact, there is ample evidence that risk might actually
increase trade in certain instances, while in other cases the effect is negligible.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1754-4408.htm
Received 8 April 2013
Revised 26 August 2013
Accepted 13 September 2013
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 7 No. 1, 2014
pp. 2-17
qEmerald Group Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-04-2013-0011
JCEFTS
7,1
2
This evidence is based on a growing number of bilateral studies that have examined
industry-level trade flows for an increasing list of country pairs. These papers tak e as
their starting points reviews by McKenzie (1999) and Bahmani-Oskooee and Hegerty
(2007), who note that both the theoretical and empirical literature find that
exchange-rate volatility has “ambiguous” results that can yield positive, negative, or
insignificant coefficients in a regression analysis. Recent examples of such studies
include Bahmani-Oskooee and Hegerty (2009a, b), Bahmani-Oskooee et al. (2012a, b, c)
and Bahamani-Oskooee, Hegerty and Xu (2012). In general, most industries analyzed
are insensitive to volatility, while the remainder is split such that a larger share of
industries are negatively affected than are positively affected.
This roster of analyses continues to expand as data on country pairs at this level of
aggregation become available. Since theory provides little guide and each country
behaves differently, each country pair must be evaluated independently. This study
does so for bilateral trade in 47 separate industries between the UK and China. Chi na
ranks as the ninth-largest UK export destination (with 2011 exports measuring more
than £7 billion) and the third largest source of imports (nearly £25 billion)[1].
There is relatively little existing literature on this country pair, although each
country has been analyzed vis-a
`-vis different partners. Industry-level effects are usually
found to be limited. Qian and Varangis (1994) find that volatility has a positive effect
on UK aggregate exports, including when China is considered as a partner. In a more
disaggregated study, Chou (2000) looks at four SITC sectors as well as total exports,
using quarterly data from 1981 to 1996. Error-correction modeling, including the
autoregressive distributed lag (ARDL) model, arrive at mostly negative results (such as
for manufactured goods and mineral fuels), although some effects are indeed positive
(such as for industrial materials). Pe
´ridy (2003) examines G-7 sectoral trade, but does
not focus on specific partners (although “Other Asia” is mentioned as a region). Clearly,
there is a need for further disaggregation in this type of empirical analysis.
Bahmani-Oskooee and Wang ( 2007) perform such an analysis, examining
US-Chinese trade for 88 industries, fewer than half of which show some response to
exchange-rate volatility. The effect tends to be positive for US exports, but negative for
US imports. Most recently, Yun (2012) examines bilateral trade between Korea and
China, finding that exchange-rate volatility might reduce trade, thus offse tting any
positive effects that result from a currency depreciation. Bahmani-Oskooee et al.
(2012d) look at roughly 100 industries’ trade between Japan and China, finding that a
larger proportion of Japanese export industries are affected by exchange rate
uncertainty than are import industries, and that a large share of manufacturing
industries’ exports are reduced by exchange-rate risk.
There is ample room in the literature for a commodity-level analysis of UK-China
trade that focuses on isolating the effects of exchange-rate risk on these flows.
We conduct such an analysis, as well as seek possible explanations for differences
among industries, in this study. We do so by applying cointegration analysis at an
annual dataset that spans from 1978 to 2010. In general, we find that our results here
match those from other studies. Most industries are not affected, but there are many
negative effects and a few positive ones. Large UK import industries are significantly
less affected than are small ones. This paper proceeds as follows: Section II explains
the econometric methodology, and Section III explains the empirical results. Section IV
concludes, and data are described in an Appendix.
Exchange-rate
risk and
UK-China trade
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