Economic interdependence and bilateral trade imbalance across the Taiwan Strait

Purpose – Despite a growing interest in research, no existing study explores the nature of, and the relationship between, the real exchange rate and trade imbalance between Taiwan and China. These economies were admitted to the World Trade Organization in late 2001 (China) and in January 2002 (Taiwan). This study aims to redress this deficiency. Design/methodology/approach – Using Johansen's cointegration approach and bilateral trade data, the study reveals overwhelming evidence of a stable long-run relationship of the real exchange rate and bilateral trade balance between Taiwan and its trading partners: China, the USA, Japan, Korea, Hong Kong and Singapore. Findings – The evidence indicates that the currency depreciation of the New Taiwan dollar improves Taiwan's bilateral trade balance, except with China. Originality/value – The findings imply that Taiwan cannot resolve the cross-Strait trade imbalance alone via the currency depreciation, and macroeconomic adjustments, including application of the WTO rules, currency exchange and imports of Chinese goods, need to be negotiated on both sides of the Taiwan Strait.