US-China trade and exchange rate dilemma: The role of trade data discrepancy

Abstract

The US and China report substantially different figures regarding their trade with each other. Empirical studies suggest that neither the US nor China can be solely blamed for this discrepancy. Previous empirical studies investigating the effects of Yuan depreciation on US-China trade largely retrieved the data from one side only without even citing which side it is. This study extends the literature regarding the dynamic effects of exchange rate on trade balance, known as the J-Curve Theory, by employing the trade data reported by the US and China independently in empirical assessment. We tested 38 trade commodities over the period 1987-2012 and found that: (i) discrepancy in trade data affects the accuracy of testing the J-Curve considerably. (ii) the coefficients suggesting that Yuan depreciation increases the US bilateral trade deficit with China seem much less inconsistent compared with the coefficients claiming the opposite. This applies to short and long run. We propose Mutual Confirmation as a robustness check for the empirical assessment of the J-Curve Theory.