The U.S.-China Trade Balance and RMB's Exchange Rate: An Empirical Analysis

As to the relationship between U.S.-China trade balance and RMB's exchange rate, this study shows that it is uncertain whether the effect of exchange rate volatility on trade balance or not, and it is impossible to resolve U.S.-China trade deficit, depending only on the movement of RMB's exchange rate. The annual data during 1994-2002 shows empirically that there is no stable relationship between U.S.-China trade balance and RMB's exchange rate (nominal or real exchange rate). The monthly data during 1998-2003 shows econometrically that there are no long-run and stable cointegrating relationships between U.S. trade (imports, exports and trade balance) with China and RMB's exchange rate. Moreover, the conclusion derived from U.S. Census Bureau monthly data is consistent with that from China National Statistical Bureau monthly data. Therefore, the argument on RMB's appreciation is based upon political factors in great degree rather than economic factors. It is impossible to resolve U.S.-China trade deficit issues with an attempt to have RMB's exchange rate floated.