Effects of exchange rates on China’s agricultural products: The case of soybean trade between China and the U.S.

Abstract

Exchange rate is a potentially important factor affecting international trade. In the past 30 years, the exchange rate of RMB against USD has changed a lot. In the recent 10 years, for example, the real RMB appreciated against the USD by 30%. This study develops an Equilibrium Displacement Model (EDM) to analyze the effects of a change in the Yuan/USD exchange rate on China’s imports of soybeans from the United States and soybean prices. The EDM predicts that when the RMB strengthens against the USD, the price China pays for soybeans imports from the United States decreases, its imports from the United States increases, and price received by U.S. producers of soybeans increases. In the second part of this paper, the predictions from the EDM are tested by replicating the empirical analysis of Devadoss et al. (2014). The empirical model provides estimates of the short- and long-run effects of a change in Yuan/USD exchange rate on China’s soybean imports from the US, the real price of soybeans in China, and the real US farm price. The results suggest the exchange rate has no effect on China’s imports of in the short-run, which conflicts with the findings by Devadoss et al. (2014). The estimated long-run effect of the exchange rate on imports is also insignificant. Thus result is consistent with Devadoss et al. (2014)’s findings. Overall, results suggest the most important factor affecting China’s imports is China’s real GNP (elasticity = 1.08), followed by the production cost of soybeans in China (elasticity = 0.38). The income elasticity suggests China’s imports of soybeans from the United States will grow at about the same pace as income growth. The estimated price equations showed little explanatory power. The exchange rate in particular was found to have no effect on price of soybeans in either China or the United States.