The Impact Of Exchange Rate On Bilateral Trade Between Korea And China

The purpose of this study is to examine the impacts of exchange rate on bilateral trade between Korea and China. Although the RMB yuan was fixed against the US dollar for several years, it has been fluctuating against the Korean won, which provides us with a natural experiment to test the exchange rate effect. This paper analyzed whether and to what extent the exchange rate between the RMB yuan and Korea won has significant impacts on bilateral trade between two countries.China is currently Korea's biggest trading partner and Korea is China's fourth biggest trading partner. Korea's recent economic growth has been partly due to increased exports to China, leading us to believe that China's the economic growth will be an important exogenous factor in Korea's growth. Both nations'reliance on each other has become more significant ever since.In order to assess the possible effects of appreciation of Chinese RMB yuan, the export function has been employed to conduct regression analysis. The quarterly trade data of industries (SITC 3 digit level) between the two countries for the period from the first quarter 1999 to the last quarter 2007 of China and Korea have been analyzed.Findings in this paper imply that real exchange rate changes have little influence on trade volume between Korea and China; impacts on the export volume of Korea to China in 13 out of 77 industries; impacts on the export volume of China to Korea in 16 out of 109 industries. Also, it is found that economic growth has contributed for bilateral trade between Korea and China much more than other variables for the last decade.