Responsiveness of United States – China bilateral commodity trade to real exchange rate misalignment: Does the complexity of traded products matter?

This paper assesses the impact of real exchange rate (RER) misalignment on the trade balance between the United States and China, accounting for the complexity of traded products. We employ two recent econometric techniques: the panel autoregressive distributed lag (ARDL) model to estimate both long – and short-run dynamics, and the dynamic panel threshold model of Seo, M. H., and Y. Shin (2016. “Dynamic Panels with Threshold Effect and Endogeneity.” Journal of Econometrics 195 (2): 169–186) to uncover potential non-linearities and identify critical thresholds that could lead to a regime shift. Using highly disaggregated trade data at the HS 06-digit level, encompassing 913 products from 2004 to 2020, our findings reveal a negative impact of RER misalignment on the United States’ trade balance with China. However, this detrimental effect is significant only in industries dealing with less complex products. In contrast, industries handling highly complex products show a notably positive impact. Furthermore, our results suggest that industries can benefit from an undervalued exchange rate only when they have a relatively high level of product complexity. Additionally, heightened product complexity can mitigate any adverse effects overvaluation might have on the trade balance.