Euro's Exchange Rate Effects On The Trade Between China And Euro Region: An Expirical Study

Being a world-wide used currency, Euro is playing an important role in the development of bilateral trade between China and Euro region. The current RMB exchange rate reform which started in July, 2005 approved Euro's effects on RMB's exchange rate formation mechanism. This paper aims to investigate the influence of Euro's exchange rate on the bilateral trade between China and Euro region during 1999 and 2006, upon which to provide suggestions to encourage the development of bilateral trade as well as improve RMB's exchange rate formation mechanism.Based on the elasticity approach, there are mainly two theories put forward to explain the relation between exchange rate and the trade balance, namely Marshall-Lerner condition and J-curve effect. This paper summarizes progress of relative research and focuses on the latest achievements. After reviewing the results of theoretical and empirical studies, we build our own model under which to perform the empirical study.The unit-root test, Johansen cointegration test, error-correct model and impulse-response function are applied. Results indicate, 1) the change of Euro's exchange rate has significant long-run effect on trade balance between China and Euro region, which stands to the existence of Marshall-Lerner condition, meaning the depreciation of RMB against Euro will enlarge the trade surplus of China against Euro region; 2) the depreciation of RMB will decrease China's trade surplus against Euro region in the short run, which approved the existence of J-curve effect between them.; 3) a depreciating RMB will increase both China's export to and import from Euro region with different elasticity for each kind of products.Findings suggest that we should weigh importance on the effects of Euro's exchange rate during our exchange rate reform. Measures must be taken to change our trade policy, upon which to avoid the negative effects of Euro's fluctuating exchange rate as well as to encourage the development of trade between China and Euro region.