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Corresponding Author:
Kamal Upadhyaya, Department of Economics and Business Analytics, University of New Haven, West Haven, Connecticut, USA

Corresponding Coauthors:
Franklin G. JR. MIXON , Center for Economic Education, Columbus State University, Columbus, Georgia, USA
Rabindra BHANDARI, Department of Business and Economics, Westminster College, Fulton, Missouri, USA

Exchange Rate Volatility and its Impact on China's Trade with the United States

(pp. 373-388)
JEL classification: F31, F33
Keywords: Exchange Rate Volatility, Exports, Imports, China, USA

Abstract

Within the last few decades China has emerged as the largest trading partner of the United States.  Today, there is a growing pressure on China from the U.S. to move China into a fully floating and convertible exchange regime, a move that is likely to make China’s currency more volatile, leading to greater exchange rate risk in international commerce.  This paper is the first to investigate the effect of exchange rate volatility on China’s trade with the U.S.  In particular, we estimate and analyze the effect of RMB volatility in both China's exports to the USA as well as imports from the United States.  Using quarterly time series data from 1994 to 2017, results suggest that real depreciation of the Chinese yuan is negatively related with China’s exports to, and imports from, the United States.  Likewise, an increase in the U.S. income boosts China’s exports to the United States, while an increase in domestic output (i.e., Chinese real GDP) boosts China’s imports from the U.S.  As such, exchange rate volatility appears to have a negative effect on both exports and imports in China (vis-à-vis the U.S.), a result we attribute to the prevalence of risk averseness among the firms engaging in international trade in both countries.


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