Trade war or currency war? How do import duties translate into the RMB/USD exchange rate?

Abstract

The global order has been dominated by the two economic superpowers: the United States and China. This article attempts to identify the implications of the trade policy followed by the Group of Two1 (G2) for the USD/RMB exchange rate. In this quantitative study, we first estimate models considering only the tariff declarations between the two countries, where a pronouncement on the imposition of tariffs is made. In the following step, in addition to the statements, we also consider determinant variables or variables that influence the fluctuations in the Chinese currency exchange rate, namely, the exchange rate from previous days (t-1 and t-2). Research shows that the beginning of the trade war between the United States and China influenced the depreciation of the latter’s currency. The effect of US declarations on the exchange rate is clearer than the impact of China’s declarations and retaliations, although the estimated models also reveal some impact of Chinese actions.