Asymmetric Roles of Exchange Rates and Their Volatility in China-US Bilateral Trade

Purpose - This study explores the asymmetric impact of real exchange rates and their volatility on bilateral trade flows between China and the United States. Design/Methodology/Approach - This study uses bilateral sector-level data, encompassing 18 exporting and 18 importing sectors, to address aggregation bias. Real exchange rates and their volatility are decomposed into positive and negative partial sums to capture potential asymmetries. A nonlinear autoregressive distributed lag (NARDL) model is applied to assess how trade flows respond to upward and downward movements in exchange rates over both short- and long-term horizons. The Wald test is then used to test for asymmetric effects. Findings - The results indicate that both real exchange rates and their volatility exert significant asymmetric effects on China’s exports and imports. For exports, the impact of real exchange rates is stronger in the short run than in the long run. By contrast, the impact of volatility is more pronounced in the long run than in the short run. Moreover, both real exchange rates and their volatility exert greater influence on imports over the long run than the short run. Research Implications - These findings suggest that policymakers need to account for the complex and asymmetric effects of real exchange rates and their volatility when formulating trade and economic policies aimed at fostering sustainable growth.