A nonlinear industry-level analysis of China's trade balances with the EU-28: Does the utilization of the vehicle currency USD matter?

Abstract

As the USD is the globally dominant vehicle currency, the exchange rate USD/CNY can affect China�s trade balances with not only the US but also other partners. Nevertheless, most of the existing studies overlook its role when analyzing China�s trade balances with non-US partners. This common drawback conceals the possible effects of currency choice for invoicing the exported and imported merchandise. Moreover, the proportion of invoicing currencies can vary from industry to industry, which implies the distinctive patterns in China�s exchange rate-trade balance nexus at industry level. Motivated by the facts that China and the EU are now the largest trading partners of each other, and they substantially use the vehicle currency USD, this paper is the first to examine the nonlinear impacts of USD/CNY on China�s trade balances with the EU-28 at industry level, which minimizes aggregation bias and reveals more detailed and helpful findings for policy-makers. The empirical results indicate that the responses of China�s trade balances in each industry are contingent on the choice of invoicing currencies. And the depreciation of CNY against the vehicle currency USD cannot stimulate China�s trade balances.