Exchange-rate Effects on China's Trade

Research paper from Review of International Economics (considered one of the top international economics journals after the Journal of International Economics).

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Given the pressure being placed on China to let its currency appreciate against the dollar it is interesting to investigate what the impact of such an appreciation would be. This paper suggests that a 10% appreciation would lead to 1% fall in exports. This intuitively seems to be in the right ballpark if not a little high.

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Exchange-rate Effects on China's Trade

* Jaime Marquez11Federal Reserve Board, Washington, DC, USAMarquez: Federal Reserve Board, Washington, DC 20551, USA. Tel: 202-452-3776; E-mail: jaime.marquez@frb.gov. Schindler: Federal Reserve Board, Washington, DC 20551, USA. Tel: 202-452-3889; E-mail: john.schindler@frb.gov. and

* John Schindler11Federal Reserve Board, Washington, DC, USAMarquez: Federal Reserve Board, Washington, DC 20551, USA. Tel: 202-452-3776; E-mail: jaime.marquez@frb.gov. Schindler: Federal Reserve Board, Washington, DC 20551, USA. Tel: 202-452-3889; E-mail: john.schindler@frb.gov.

Marquez: Federal Reserve Board, Washington, DC 20551, USA. Tel: 202-452-3776; E-mail: jaime.marquez@frb.gov. Schindler: Federal Reserve Board, Washington, DC 20551, USA. Tel: 202-452-3889; E-mail: john.schindler@frb.gov.


Abstract


Though China's share of world trade exceeds that of Japan, little is known about the response of China's trade to changes in exchange rates. The few estimates available have two limitations. First, the data for trade prices are based on proxies for prices from other countries. Secondly, the estimation sample includes the period of China's transformation from a centrally-planned economy to a more market-oriented one. We address these limitations with an empirical model explaining the shares of China's exports and imports in world trade in terms of the real effective value of the renminbi. The specifications control for foreign direct investment and for the role of imports of parts to assemble exports. Parameter estimation uses disaggregated monthly trade data and excludes China's decentralization period. We find that a 10 percent real appreciation of the renminbi lowers the share of aggregate Chinese exports by nearly one percentage point. However, the estimated response of imports is negligible and lacks precision.