The Trade Imbalance between the United States and China : The Role of Exchange Rate and Trade Liberalization

The pattern of trade between the United States and China has dramatically changed during the past fifteen years. Until 1992, the commodity trade volume between the two countries was around 10 billion U.S. dollar per year, but it grew to 60 billion dollars in 1999. Because China has kept its currency (yuan or renminbi) pegged to the U.S. dollar since 1994, its current large trade surplus with the United States has led some critics to claim that the yuan is undervalued. The aim of this paper is to examine the effect of the U.S.-China bilateral exchange rate on the pattern of trade between the two countries after controlling for alternative factors influencing U.S.-Chinese bilateral trade flows. The results suggested that the U.S.-China bilateral exchange rate does not have an important role in explaining bilateral trade between the two countries, while the relative exchange rate between the United States and the South-East Asian countries are more important in explaining the trade imbalance problem.