Examining the relationship between trade balance and exchange rate: the case of China's trade with the USA

Abstract

In this paper, we investigate the nexus between China's trade balance and the real exchange rate vis-a`-vis the USA. Using the bounds testing approach to cointegration, we find evidence that China's trade balance and real exchange rate vis-a`-vis the USA are cointegrated, and using the autoregressive distributed lag model we find that in both the short run and the long run a real devaluation of the Chinese RMB improves the trade balance; as a result, there is no evidence of a J-curve type adjustment.