The Trade Destruction Effect and Trade Diversion Effect of RMB Appreciation

Hongjin Xiang (), Zheng Zhan and Mingyong Lai ()
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Hongjin Xiang: School of Economy & Trade, Hunan University, Changsha 410079, China
Zheng Zhan: School of Economics and Finance, Xi¡¯an Jiaotong University, Xi¡¯an 710049, China
Mingyong Lai: School of Economy & Trade, Hunan University, Changsha 410079, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2011, vol. 6, issue 3, 479-493

Abstract: This paper examines how Chinese RMB appreciation affects China and its competitor¡¯s exports to the third market at industry level. We develop a two-country competition model to analyze the trade destruction effect and trade diversion effect of RMB appreciation. The theoretical analysis shows that the appreciation of RMB has negative impacts on China¡¯s exports and positive impacts on its competitor¡¯s exports. We then empirically test how the appreciation of RMB to the US dollar affects China¡¯s and India¡¯s textiles and apparel exports to the US from 1995Q1 to 2008Q4. The empirical results show that an 1% appreciation of RMB to US dollar will reduce China¡¯s exports of textiles & apparel to the U.S. by 2.63% and raise the India¡¯s exports of textiles & apparel to the U.S. by 2.71%.

Keywords: RMB appreciation; trade destruction effect; trade diversion effect; cointegration (search for similar items in EconPapers)
JEL-codes: F14 F31 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fec:journl:v:6:y:2011:i:3:p:479-493

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