Currency Choice and Trade Balance: Nonlinear Effects of USD Use in ASEAN-China Trade

Abstract

In this paper, we analyse how the trade balance between the Association of Southeast Asian Nations (ASEAN) and China responds under different currency arrangements, specifically when the US dollar (USD) is used as a payment currency versus when it is not, by employing the NARDL estimation method. The results demonstrate that the decline of ASEAN currencies, irrespective of the currency utilized for payment, leads to a deterioration in ASEAN’s trade balance with respect to China.  Moreover, the upswing of ASEAN currencies relative to Chinese yuan (CNY) or the USD has a negligible impact, which suggests asymmetrical responses of the trade balance. In addition, ASEAN’s income plays a crucial role in shaping its trade balance, exerting a noticeable negative influence. The findings of this paper imply that a devaluation policy is inapplicable to ASEAN’s trade balance with China, and the increased usage of the CNY may not strongly affect their trade outcomes.