Consistent estimates of world trade elasticities and an application to the effects of Chinese Yuan (RMB) appreciation

Abstract

Import demand equations for 30 industrial and Asian countries are estimated using cross-country panel data for the period from 1984 to 2003. Income, price, transportation cost, language, location and other gravity-type variables are found to be highly significant. The income elasticity estimates range from 1.05 to 3.10. The income elasticity of U.S. imports is higher than the income elasticity estimates of U.S. major trading countries, such as Germany and Asian countries. This income elasticity difference indicates the need for a trend real depreciation of the U.S. dollar to prevent the U.S. trade deficit from expanding excessively. The price elasticity estimates are between 0.4 and 1.2. The price elasticity estimate of China's import demand is 0.5, whereas the export-share-weighted average of the price elasticities of 29 foreign import demands is 0.7. RMB appreciation is found to lower China's trade balances with 29 industrial and Asian countries. While the reduction in China's trade balance is expected to be substantial with Germany, Japan and Asian tigers, it will be small with the United States.