Should I stay or should I go? The role of the renminbi in trade partnerships in the Asia-Pacific region

Abstract

ABSTRACT In this paper, we examine the price elasticity of China’s aggregate imports and then provide further details on this elasticity in partner countries according to their participation in two alternative trading arrangements (TPP vs RCEP) and their level of development. By using different types of data and appropriate methodologies to conduct our analysis at both global and bilateral levels, we observe that the price elasticity of China’s imports is negative, which is consistent with the most recent studies and challenges the conventional wisdom. One hypothesis that might explain this result is the suppliers’ patterns of trade. Since export diversification by trading partners can affect the sensitivity of Chinese imports to relative price movements, we endogenise the import price elasticity accordingly. We find that negative elasticities are more prominent when China’s trading partners are developing countries, and when we consider their diversification in export markets. On the whole, the more partner countries are diversified in their export destinations, the lower the import price elasticity is in absolute terms. We conclude that export diversification by partner countries allows China to increase her ‘resilience’ to movements in its exchange rate. The same tests are performed in the case of the US for comparison.