Exchange-rate risk and UK-China trade: evidence from 47 industries

Abstract

Purpose– Recent years have seen a rapid expansion of studies that examine the effects of exchange-rate risk on bilateral exports and imports for specific industries. Since the underlying theory is ambiguous, each case must be studied individually. This paper considers British trade with China, for 47 types of product, over the period from 1978 to 2010. Consistent with the underlying theory, cointegration analysis shows that most industries register no effect due to volatility in the long run, while some trade flows are reduced and a handful are even increased. An analysis of industry characteristics suggests that while the type of good might play little role on an industry's specific results, a product's trade share does. This is the case for UK imports of Chinese goods, perhaps because large Chinese exporters are able to successfully hedge against exchange-rate risk. The paper aims to discuss these issues.Design/methodology/approach– The method is based on bounds testing approach to cointegration and error-correction modeling.Findings– The paper arrives at two key conclusions. First, as has been shown previously for other country pairs, most industries demonstrate no long-run response to exchange-rate volatility. A fraction of industries are affected, and most of these effects are negative.Research limitations/implications– This research pertains to the case of industry trade between the UK and China only.Practical implications– The paper identifies industries that are affected by exchange rate uncertainty.Originality/value– No study has looked at the impact of exchange rate uncertainty on the trade flows between China and the UK at commodity level.