ASEAN's trade balance with the whole EU-28 at industry level: The role of vehicle currency

Abstract

The literature on exchange rate-trade balance nexus exhibits two notable trends: the transition from linear to nonlinear assumption, and the thorough analyses at aggregate, bilateral, and industry levels. Moreover, most of the existing studies neglect the role of vehicle currency, which fails to capture the dominance of USD in global trade as well as its impacts on the trade of any two non-U.S. partners. This is a common limitation leading to the lack of useful findings. Recognizing the vital importance of USD as vehicle currency in the trade between ASEAN (Association of Southeast Asian Nations) and the EU-28, this paper well analyzes its role. Further, this paper is the first to evaluate the impacts of vehicle currency USD exchange rate, along with real effective exchange rate, on ASEAN's trade balance with the EU-28 at industry level, which provides helpful information for policy makers. The results confirm the irrefutable importance of USD as vehicle currency when it has significant long-run impacts in all industries. Besides, short-run and long-run asymmetries are detected in most of the industries, which affirms the suitability of NARDL method.