Abstract
Most previous research did not find powerful evidence suggesting the depreciation of Chinese yuan had contributed significantly to the trade imbalances between the United States and China. In our current study, we employ quarterly data from 2005Q3 to 2018Q3 and an error correction model to examine the responsiveness of bilateral trade flows between the United States and China to relative prices and the nominal exchange rate under China’s managed floating exchange rate regime. To test for a possible structural break due to the financial crisis in 2008, we carry out Chow tests. But the results support no structural break. We find strong evidence that depreciation of Chinese currency yuan encourages U.S. imports from China and discourages U.S. exports to China. In addition, an increase in U.S. income will promote U.S. imports from China significantly, and a higher Chinese income will remarkably encourage U.S. exports to China. Finally, the bilateral trade flows between the United States and China respond differently to the relative prices and nominal exchange rate.
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