Does The Exchange Rate Fluctuation Affect Trade Flows? Evidence From The Textile And Clothing Industry Of Zhejiang Province, China

In 2005, China announced replacing the USD-pegging exchange rate regime with the currency basket regime. Since then, RMB has started its journey to appreciate. In recent years, other countries have raised the cost of entering their markets, while China has adjusted its export tax rebate. All those above mean more uncertainty faced by the textile and clothing industry in China. As the result, this paper has analyzed the effects that the exchange rate fluctuations of RMB imposed on the textile and clothing industry of Zhejiang Province in the context of an augmented gravity model, using the panel data from 1999 to 2006 which covers 11 import partners and 29 export partners.While both the nominal exchange rate and real exchange rate are explored, the paper has used two different measures to represent the exchange rate volatility. The empirical results have indicated that both nominal exchange rate and real exchange rate indeed have effect on import or export, and the effects are statistically significant. Specifically, the effects on import are significant negative, while the effects on export are ambiguous. The uncertainty of nominal exchange rate is found to have positive effect on the export, but the uncertainty of real exchange rate's effects are negative. Meanwhile, GDP, GDP per capita and the geography distance are also found to play an important role.In general, the empirical evidence in this paper supports the basic paradox as to the impact of exchange rate uncertainty on trade flows that remains unresolved at both the theoretical and empirical level. In the end of this paper many suggestions are given, such as the adjustment of the industrial structure, the acceleration of the industrial escalation, the improvement of the products' added value and etc.