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Frontiers of Economics in China

Front Econ Chin    2011, Vol. 6 Issue (3) : 479-493     https://doi.org/10.1007/s11459-011-0143-3
research-article
The Trade Destruction Effect and Trade Diversion Effect of RMB Appreciation
Hongjin Xiang1(), Zheng Zhan2, Mingyong Lai3()
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%.

Keywords RMB appreciation      trade destruction effect      trade diversion effect      cointegration     
Corresponding Author(s): Hongjin Xiang,Email:xhjin2006@163.com; Mingyong Lai,Email:laimingyong@126.com   
Issue Date: 05 September 2011
 Cite this article:   
Hongjin Xiang,Zheng Zhan,Mingyong Lai. The Trade Destruction Effect and Trade Diversion Effect of RMB Appreciation[J]. Front Econ Chin, 2011, 6(3): 479-493.
 URL:  
http://journal.hep.com.cn/fec/EN/10.1007/s11459-011-0143-3
http://journal.hep.com.cn/fec/EN/Y2011/V6/I3/479
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