Exchange Rate Uncertainty and Trade Flows Between the United States and China

Abstract

This article assesses the impact of the RMB-dollar exchange rate and volatility on U.S. agricultural exports to and imports from China. Two measures of volatility are employed: one based on the moving standard deviation of the real RMB-dollar rate, the other a GARCH-based measure which yields more significant results. We find that exchange rate volatility has a significantly positive long-run effect only on export earnings of the nonagricultural sector. On the other hand, depreciation of the dollar has an expected long-run effect on the import value of the nonagricultural sector and on export earnings of the agricultural sector. No matter which model we consider, the level of economic activity in both countries seems to be the major long-run determinant of trade flows in both directions.