Currency Manipulations and Bilateral Trade Between China and the USA

Abstract

The US trade deficit with China has existed for a long time, and its dollar value has been on the rise recently. It is widely believed that the main culprit is the manipulated value of Renminbi relative to the US dollar. Towards that end, this article re-examines the spot exchange rate and bilateral trade nexus using the Fourier approximation and a variant of the well-known gravity model during the sample period 1993: q1–2014: q1. Although China’s exports to the US Granger cause the exchange rate in a co-integrated space, the findings of a vector error correction model indicate that there is not a strong relation between the two. Indeed, within the aforementioned sample, only 15.52 per cent of changes in China’s exports to the USA are attributable to changes in the spot exchange rate. This is noticeably much smaller than impacts of the other variables utilized in the estimated gravity model. As such, the palpable trade imbalance between the USA and China cannot be single-handedly blamed on the spot exchange rate manipulations.