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Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 09 de 2015


The Impact of the Chinese Exchange Policy on Foreign Trade

with the European Union

Ana Cardoso
Faculdade de Economia da Universidade de Coimbra

António Portugal Duarte
Faculdade de Economia da Universidade de Coimbra e GEMF


The aim of this paper is to analyze the impact of the Chinese foreign exchange policy on foreign trade with the European Union. After describing the importance of the exchange rate in an open economy and some of the methodologies employed to calculate its equilibrium value, we examine whether the Chinese competitiveness is due to the existence of misalignment (undervaluation) of its exchange rate, or rather, to other sources of competitiveness. For this purpose, we use a Vector Error Correction (VEC) model to estimate a long-run exports equation. The empirical results indicate that over the past few years, Chinese exports have benefited from an ‘unfair’ competitive advantage resulting from the manipulation of its currency value.

JEL Classification: C39, F10, O24.

Keywords: Competitiveness, China, European Union, foreign trade, misalignments, real exchange rate.

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