Revaluation of the Chinese Yuan and triad trade: A gravity assessment

The literature had paid little attention to the endogenous nexus between exchange rates and bilateral trade. In this paper, I use a gravity model to investigate the two-way causality between exchange rates and bilateral trade with data from China, Japan, and the United States during the 2002-2007 period. After controlling for the simultaneous bias between exchange rates and bilateral trade, the extensive empirical evidence shows that the revaluation of the Chinese Yuan against the dollar significantly reduced China's exports to the United States but had no significant effects on China's exports to Japan. These findings are robust to different measures, econometric methods, and period coverage.