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The Trade Destruction Effect and Trade Diversion Effect of RMB Appreciation

Author

Listed:
  • 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)

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%.

Suggested Citation

  • Hongjin Xiang & Zheng Zhan & Mingyong Lai, 2011. "The Trade Destruction Effect and Trade Diversion Effect of RMB Appreciation," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 6(3), pages 479-493, September.
    • Handle: RePEc:fec:journl:v:6:y:2011:i:3:p:479-493
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    File URL: http://journal.hep.com.cn/fec/EN/10.1007/s11459-011-0143-3
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    Cited by:

    1. Mario Arturo Ruiz Estrada & Donghyun Park & Muhammad Tahir & Alam Khan, 2018. "How does terrorism affect the international trade of Muslims countries?," Quality & Quantity: International Journal of Methodology, Springer, vol. 52(5), pages 2255-2268, September.

    More about this item

    Keywords

    RMB appreciation; trade destruction effect; trade diversion effect; cointegration;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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