Impact of exchange rate volatility on commodity trade between U.S. and China: is there a third country effect

Abstract

Impact of exchange rate uncertainty on trade flows still continues to dominate the literature. Most previous research has used aggregate trade data between one country and the rest of the world or between two countries at a bilateral level. A recent study, however, considered the trade between the U.S. and China at the commodity level, but excluded the “third-country” effect in its analysis. In this paper, we consider the commodity trade between the U.S. and China one more time and investigate whether volatility of the real U.S. dollar-Canadian dollar has any implication on the trade flows between the U.S. and China. The answer happens to be in the affirmative, though a more significant third-country effect is found in the short run as compared to the long run.