The role of vehicle currency in affecting trade balance: empirical evidence from the trade of China and The Association Of South East Asian Nations with The European Union

Abstract

Although the global trade is dominated by USD, its role as a vehicle currency has been inadequately researched in the literature about the exchange rate-trade balance nexus. This dissertation is the first study to examine the role of the USD as a vehicle currency in affecting the trade balances of China and the Association of South East Asian Nations (ASEAN) with the European Union (EU). This dissertation scrutinizes the effects of the use and the nonuse of the vehicle currency USD on China’s and ASEAN’s trade balances with the EU at different levels of analyses. The results estimated by the Nonlinear Autoregressive Distributed Lags (NARDL) method indicate that the use and the nonuse of the vehicle currency USD have distinguishable impacts on the trade balances at different levels of analyses. Thus, the effectiveness of the weak-currency policy in supporting trade balance is subject to the invoicing currencies. In addition, role of the USD as a vehicle currency should not be overlooked when analyzing the exchange rate-trade balance causality in the trade between two non-US partners.