The Relationship Between Exchange Rate And Sino-Korean Vegetables Trade

South Korea’s vegetables trade has been on the rise for the past two decades, particularly with China. Vegetable trade accounts for only a minimal portion Korea’s total trade. However, it is an important issue for Korea and its people, especially since Korea’s domestic production continues to decline and its dependence on vegetable imports grow. Furthermore, with China’s economy rapidly growing, its currency has been at the center of trade disputes for many of its trading partners, including Korea.This study attempts to explore the relationship between real effective exchange rate and vegetables trade in the case of South Korea and China. Quarterly data for the period1993-2010were collected for the explanatory variables:real effective exchange rate of China, Korean export and import values with China, and the GDP of both countries. The time series econometrics methods of unit root tests and cointegration were applied to seasonally adjusted data to investigate the relationship.Results suggest that both Korean exports and imports each have a positive relationship with real effective exchange rate. This implies that the depreciation of the exchange rate has a positive long-run effect on vegetables trade. Also, the trade balance, both exports and imports, are cointegrated with the real effective exchange rate, domestic GDP, and foreign GDP. The variables have a long-run relationship. Moreover, since the sum of the absolute values of the elasticities are all greater than unity, the Marshall Lerner condition holds in the long run, implying that the depreciation of the exchange rate will have an encouraging effect on vegetables trade. Thus, the final implication of this study’s results is that, in terms of policy measures, the exchange rate can be used when considering external imbalances in the long-run.