Robert M. La Follette School of Public Affairs

The Structural Behavior of China-U.S. Trade Flows

By examining Chinese-U.S. trade flows for 1994-2012, the authors find that, in line with the conventional wisdom, the value of China's exports to the United States responds negatively to real renminbi appreciation, while import responds positively. Further, the combined empirical price effects on exports and imports imply an increase in the real value of the renminbi will reduce China's trade balance. The use of alternative exchange rate measures and data on different trade classifications yields additional insights. Firms more subject to market forces exhibit greater price sensitivity. The price elasticity is larger for ordinary exports than for processing exports. Finally, accounting for endogeneity and measurement error matters. Hence, purging the real exchange rate of the portion responding to policy or using the deviation of the real exchange rate from the equilibrium level yields a stronger measured effect than when using the unadjusted bilateral exchange rate.

Additional Info

  • Volume or issue no.: La Follette School Working Paper No. 2014-009
  • Author(s): Yin-Wong Cheung, Menzie D. Chinn, and Xingwang Qian