Kara, Orhan
July 2012
Journal of International Finance & Economics;2012, Vol. 12 Issue 3, p71
Academic Journal
The U.S. trade deficit has increased over the years with China and several public officials and commentators speculated that China has been engaging in currency manipulation and that various proposals appeared to take action against China. Although there seems to be some consensus emerging that Chinese currency is undervalued, not only did previous research produce mixed result as to how much the currency is undervalued, but the empirical evidence as to how much appreciation would improve the U. S. trade deficit is scarce and no agreed upon conclusion has been reached. This study examines the trade flows between the U.S. and China to find the effect of changes in the renminbi on the U.S. trade deficit. The conclusions reveal that the U.S. imports from China are more sensitive to changes in the U.S. income than the U.S. exports to China to the changes in the Chinese income level. A one percent increase in the U.S. income increases imports from China by about 6.9 percent while a one percent increase in the Chinese GDP raises the U.S. exports to China by about 2.1 percent. Furthermore, a one percent appreciation of the renminbi leads to an about 0.82 percent decrease in the value of the U.S. imports from China and an about two percent increase in the value of the U.S. exports to China. Finally, the renminbi should appreciate about fifty six percent in order to eliminate the U.S. trade deficit with China based on 2011 trade flows.


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