Abstract:

The modern mainstream in economic globalization and integration suggests that trade cooperation is being a trend that forges foreign trade generally contributes as a vital driving force to the national economic development. In particular, changes in the exchange rate due to either market forces or monetary policies have been viewed as a direct effect on a country’s trade balance, industrial development, and macroeconomic growth. Since China acceded to the World Trade Organization (WTO), its economic openness has been further enhanced, and the total foreign trade volume has multiplied. However, the Renminbi (RMB) exchange rate lately has received widespread attention. This paper examines and discusses the impact, if any, of exchange rate changes under currency appreciation on China’s trade balance from 2005 to 2019. For the selection of necessary variables related to trade balance, we use a set of independent variables including income, RMB exchange rate, and FDI to research the correlation between those variables by using the co-integration testing method and impulse response function. The empirical testing results suggest that RMB appreciation could affect China’s trade balance, though not significantly, and most likely reduce the trade surplus. The appreciation in RMB also creates a favorable environment for domestic enterprises to trade. Further, the Chinese government should take appropriate measures to respond to the impact of RMB appreciation on China’s exports.