CAN AN IMPORT TARIFF PRODUCE A J-CURVE LIKE EFFECT?

Abstract

ABSTRACT There is no doubt that U.S. trade balance with China is a matter of concern, as it has not only been in the negative ever since 1992, but the negative balance is increasing at an increasing rate. The goal of this study, therefore, is to investigate whether imposing tariffs on imports from China will improve U.S. trade balance with that country. We define our independent variable, BOT (balance of trade), as U.S. net export to China. Our independent variables include RGDP (ratio of U.S. GDP over China's GDP), EX (U.S. dollar's exchange rate) defined as the number of Chinese currency, Renminbi, needed to purchase one U.S. dollar, and CCPI (China's consumer price index). Our study covers the period from 1988 to 2018. We estimate a vector error correction model (VECM). We use a rise in China's consumer price index as a proxy for tariff led rise in the price of Chinese products facing U.S. consumers. Our findings imply that an import tariff on Chinese products will not improve, rather deteriorate U.S. trade balance with China in the long run and will have no effect in the short run. Keywords J-curve effect, export-to-import ratio, exchange rate, unit root, cointegration