The J-curve: evidence from commodity trade between US and China

Abstract

In testing the short-run (J-curve effect) and the long-run effects of currency depreciation on the trade balance many researchers have used either trade data between one country and the rest of the world or between one country and another trading partner. Both groups are said to suffer from aggregation bias. To reduce the bias, in this article we consider trade data between one country (the US) and her trading partner (China) disaggregated by commodity. We use imports and exports of 88 industries (2-digit and 3-digit classifications) and cointegration analysis to show that the trade balance of at least 34 of the industries react favourably to real depreciation of the dollar. The J-curve effect is detected in 22 industries. Furthermore, most of these industries that are sensitive to currency depreciation are durable commodity groupings.