Exchange Rate Adjustments and US Trade with China

What is it about?

Although politicians easily blame the US trade deficit with China on China's manipulation of foreign exchange rates, economists have not yet achieved an agreeable conclusion. We explore the trade effects of bilateral real exchange rate changes between the 50 US states and China.

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Why is it important?

The empirical results based on state-level trade flows and state-level relative prices suggest that the long-run real exchange rates elasticity of US exports to China is in the range of [–3.77, –2.85] and that of Chinese exports to the US is in the range of [–0.23, –3.34]. We also find that state-level differences in human capital and financial development are significant determinants of their export performances with respect to China. Based on the most optimistic scenario, our results suggest that the RMB needs to further appreciate against the dollar by at least 1.8 percent a year for 16 years for the US to achieve balanced trade with China.