A period assessment of exchange rate movements and trade flows between the US and China

The behavior of the exchange rate between the Chinese yuan and the US dollar has transitioned through four notable phases since 1995. This study explores the long-term (growth) and short- term (cycle) relationships between the yuan/$ exchange rate and goods trade flows between China and the US during each of these phases. Main findings support traditional thinking for the long-term: a depreciating dollar is correlated with accelerated growth in US exports to China and diminished growth in US imports from China, and a fluctuating exchange rate suggests mild growth in trade flows between the two nations. We find a non-linear relationship between exchange rate movements and goods trade flows in the short term, which implies the size of the overall impact of an exchange rate movement on goods trade will depend on the existing strength of the dollar. These results are connected to on-going discussions on trade policy between these two countries and imply China has reduced incentive to purposely manipulate exchange rates to benefit their own export sector.