An Examination Of The Impact Of Yuan Appreciation On The Sino-U.S. Trade Imbalance

Abstract

China has become the United States' largest import source, second largest trading partner, and third largest export market. However, political tensions over trade relations between these two countries continue growing. U.S. policymakers blame the Chinese government's manipulation of its currency as a cause of the U.S. trade deficit. This paper investigates whether the recent Chinese currency appreciation has decreased the U.S. trade imbalance, and analyzes what sectors are affected the most by the Yuan appreciation. To analyze the elasticity of the Yuan appreciation, I use fourteen years of quarterly data from US Census Bureau, U.S. Bureau of Labor Statistics, Federal Reserve Bank of St. Louis, the World Bank's World Development Indicators (WDI) and International Financial Statistics from the International Monetary Foundation (IMF) in gravity model of international trade. Consistent with previous research, I found that Yuan appreciation in real terms reduce U.S. trade deficits. China's traditional low-tech and labor-intensive exporting industries are affected the most; however, Chinese industrial goods are not sensitive to the rise of the exchange rate.