The goal of this research is to investigate the short term and long term relationship between exchange rate and trade balance. Differing test such as Johansen Cointegraion test, Vector Error Correction, Wald test etc., have been conducted. The data was collected from International Financial Statistics (IFS), Organization for Economic Cooperation and Development (OECD) and Asian Regional Integration Center (ARIC). The conclusion is as follow: • Long run relationship between real exchange rate and trade balance occurs, and • The coefficient of real exchange rate is negative and significant. The results implies that devaluation of currency to cure trade deficit between Vietnam and China may not an appropriate method, for instance, the trade performance of Vietnam to China could deteriorate.
University of Economics Ho Chi Minh City; VNP (Vietnam – The Netherlands Programme for M.A. in Development Economics)