Third-Country Exchange Rate Volatility and Pakistan-China Trade at the Commodity Level

ABSTRACT

This study examines the impact of exchange rate volatility on China-Pakistan trade flows from 1980 to 2020. Using data from 42 import industries and 34 export sectors, bilateral trade between China and Pakistan is analyzed, with the US as the third country. Cointegration analysis reveals a strong relationship between Pakistan-China trade flows and exchange rate volatility. The yuan/dollar exchange rate negatively affects 22 import and 24 export industries in Pakistan, while the rupee/dollar exchange rate negatively impacts 31 import and 17 export industries. Findings suggest that the exchange rate volatility of the third country hampers bilateral trade between Pakistan and China.

KEYWORDS:

• Bilateral trade
• exchange rate volatility
• rupee/dollar exchange rate
• yuan/dollar exchange rate

Acknowledgments

Valuable comments from anonymous referees are greatly appreciated. Any remaining errors, however, are ours.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplemental data

Supplemental data for this article can be accessed online at https://doi.org/10.1080/08853908.2023.2256849.

Notes

¹ In addition, detailed information and supplementary analysis including unit root test and cointegration results can be found in the online appendices provided alongside this article on the journal’s website.

² Because certain sectors were excluded from the sensitivity analysis while others were added, the revised list of industries is coded with the letters X for exporting industries and M for importing industries to maintain its uniqueness.