Abstract
Using autoregressive distributed lag (ARDL) methodology with both aggregate and disaggregate data, the purpose of this study is to examine the effects of the VND/CNY currency exchange rate (including exchange rate level and volatility) on trade flows between Vietnam and China. In the disaggregate models, the long-run results indicate that nine import commodities (accounting for approximately 28.67% of the total import value) are sensitive to changes in the real exchange rate level, and nine export commodities (accounting for approximately 39.15% of the total export value) also respond to changes in the exchange rate level. Most of the unaffected commodities are raw, intermediate, and simply processed products (the biggest components in total import value). The study also finds that export commodities are more sensitive to exchange rate volatility than import commodities. In addition, the results of the aggregate model indicate that there is no statistical evidence of any linkage between the exchange rate and trade (exports and imports). In other words, the exchange rate is unlikely to be an effective tool to improve the trade balance between Vietnam and China. This study contributes towards the empirical argument for effective coordination between the monetary and trade policy of Vietnam. Keywords: trade; deficit, exchange rate, import, export, China, Vietnam, autoregressive distributed lag
Highlights
China has become the biggest trading partner of Vietnam since 2010
The results show that there are 9 commodities where real exchange rate coefficients are significant at the 5% or 10% level
The results show that the coefficients of both the exchange rate level and exchange rate volatility are insignificant in the import model, thereby suggesting the possible existence of an aggregate bias problem
Summary
China has become the biggest trading partner of Vietnam since 2010. Imports from China only accounted for 8.9% of total imports to Vietnam in 2002 but increased to 23.3% in 2011 and 28.7% in 2016 (GSO, 2017). Whereas exports to China steadily contributed around 10% of the total exports for the same period. The Impact of Exchange Rates on Vietnam-China Bilateral Trade. During 2000-2015, Vietnam registered a surplus in trading with China for the first few years, but the balance turned to a persistent deficit since 2002 with the value of the imports regularly exceeding twice or three times the total value of exports (see Figure 1). As of 2015, imports from China to Vietnam amounted to 49.3 billion USD and exports were 17.14 billion USD leading the trade deficit to reach a record of 32 billion USD (GSO, 2017)
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