Exchange Rate Movements and China-East Africa Trade Balance: A New Perspective From China

This study estimates the long-term impact of Chinese RMB exchange rate movements on the trade balance between China and the Eastern African Belt and Road Initiative countries. The Pedroni cointegration analysis and the fully modified and dynamic OLS techniques are applied to the dataset from UNComtrade and China Statistical Yearbook 2019. Some specification novelties are the use of imports and exports as independent variables. By so doing, the paper proposes an alternative measure of the trade balance. We find that the RMB exchange rate movements are stable during the sample period and slightly affect the trade balance between China and the Eastern African BRI countries. Additionally, the study does not find evidence supporting the J-curve effect in China-East Africa trade balance. The empirical results suggest that the Eastern African BRI countries would gain much more trading collectively with China than individually. Therefore, the study strongly recommends that the East African Community accelerate its integration process and establish Export Quotas for trade outside the bloc. Purpose: estimate the long-term impact of Chinese RMB exchange rate movements on the trade balance between China and the Eastern African Belt and Road Initiative (BRI) countries. Methods: We use the Pedroni cointegration analysis along with the fully modified and dynamic OLS techniques. Conclusions: The RMB exchange rate movements are stable during the sample period and slightly affect the trade balance between China and the Eastern African BRI countries. Limitations: The study uses an experimental approach of assessing the trade balance instead of the traditional approach. The study only investigate the long-term impact of RMB exchange rate movements and does not investigate the short-run impact. The study only applies the model to RMB, slightly applies the model to USD but does not apply the model to significant foreign currencies such as the European Euro and the British Pound.