The trade destruction effect and trade diversion effect of RMB appreciation |
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Authors: | Hongjin Xiang Zheng Zhan Mingyong Lai |
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Institution: | 1. School of Economy & Trade, Hunan University, Changsha 410079, China; 2. School of Economics and Finance, Xi’an Jiaotong University, Xi’an 710049, China; 3. School of Economy & Trade, Hunan University, Changsha 410079, China |
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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%. |
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Keywords: | RMB appreciation trade destruction effect trade diversion effect cointegration |
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