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JCEFTS
5,1 Exports, imports and
economic growth in China:
an ARDL analysis
42
Qazi Muhammad Adnan Hye
Institute of Business Management (IOBM), Karachi, Pakistan

Abstract
Purpose – The purpose of this paper is to investigate the export-led growth, growth-led export,
import-led growth, growth-led import and foreign deficit sustainability hypothesis in the case of China,
using annual time series data from 1978-2009.
Design/methodology/approach – For estimation evidence this study employs the Phillips Perron
unit root tests to examine the level of integration and the autoregressive distributed lag (ARDL)
approach is employed to determine the long run relationship, and the direction of long run and short
run causal relationship is examined by using modified Granger causality test.
Findings – The results confirm the bidirectional long run relationship between the economic growth
and exports, economic growth and imports, and exports and imports. These findings guided the authors
to conclude that the exports-led growth, growth-led exports, imports-led growth and growth-led imports
hypothesis is valid, and foreign deficit is sustainable for China. The long run elasticities are as follows:
the elasticity of economic growth with respect to exports is 0.591, and elasticity of exports with respect to
economic growth is 1.635. The elasticity of economic growth with respect to imports is 0.621, and
elasticity of imports with respect to economic growth is 1.392. Further more the elasticity of exports with
respect to imports is 1.322, and imports elasticity with respect to exports is 0.975.
Originality/value – This study utilizes the relative new cointegration method of ARDL approach.
The empirical findings of this study are vital for policy makers of China in the formulation of trade
policies.
Keywords China, Trade, Economic growth, Imports, Exports, ARDL
Paper type Research paper

Journal of Chinese Economic and
Foreign Trade Studies
Vol. 5 No. 1, 2012
pp. 42-55
q Emerald Group Publishing Limited
1754-4408
DOI 10.1108/17544401211197959
Introduction
The process of economic reforms was started by the Government of China in 1978. The
main objective of these reforms was to boost the economic growth through enhancing
the efficiency and productivity of different sectors of the economy. The stable political
system, efficient utilization of natural resources and skilled labor force in China, has
made it a modern global factory. The adoption of trade liberalization policy in China is
experienced fast economic growth. The actual trade reforms in China are described by
the significant reduction of tariffs, imports restrictions and with the reallocation of
imports substituting outcome into export industries (Chow and Lin, 2002). These
motivated economic reforms aimed to lead China as an export-oriented country and the
expected results have been drawn. Figure 1 shows that China’s foreign trade has
increased steadily since the implementation of economic reforms. From the last 20 years
the annual international trade volume has grown annually at the rate of 18.1 percent
Republic of China ROC (2011). It climbed from US$21.08 billion in 1978
JEL classification – F43, C23, F15
 3,000 Economic
2,500 Y X M growth in China
2,000

1,500

1,000 43
500
Figure 1.
0 China trade and
1980 1985 1990 1995 2000 2005
economic growth
Source: Republic of China (ROC)

to US$2,207.22 billion in 2009, indicating the increasing opening-up of the Chinese

economy. The real gross domestic product (GDP) during the same period reached its
high level of US$2,937.22 billion in 2009 against US$157.71 billion in 1978[1]. As for the
trade balance point of view, the total value of import higher than the volume of export in
the years 1985, 1986, 1993 and 1996 (Figure 2). This is due to the fact of China import
machinery and capital goods. In 1980 China was exported 50.3 percent primary goods
of total export, as manufactured goods accounted for 49.7 percent. Now the share of
primary goods export is 5.4 percent and expansion in the export of manufacturing share
at dominant level of 94.6 percent (China Statistical Year Book). China’s share in
international trade and its international ranking has increased steadily since 1979.
In 1979 China was ranked 29th largest trading country in the world and then ranked
eighth largest traded country in 2000. China was surpassed the Canada and the UK in
2002 and become the fourth largest trading country in the world. It becomes the third
largest trader in 2008[2]. With this background in mind, it is important to investigate the
relationship between exports and economic growth, imports and economic growth in the
case of China.
This study provides empirical evidence by using the autoregressive distributed lag
(ARDL) model of Pesaran et al. (2001). This ARDL technique has following advantage
over the other cointegration methods: first, it assumes that all variables are endogenous.
Second, it is applicable whether the underline variables are integrated order one I(1),

500

400

300

200

100

0 Figure 2.
Trade balance in China
–100 (export-import)
1980 1985 1990 1995 2000 2005
JCEFTS integrated order zero I(0) or fractionally integrated. Last, the long- and short-run
5,1 parameters of the model are estimated simultaneously. The remaining paper is
organized as follows: second section reviews the related literature. The third section
describes methodology. Subsequently, the fourth section presents the empirical results
and interpretation, and finally, the conclusion is offered in fifth section.

44 Literature review
The empirical literature on export, import and economic growth nexus are distinguished
between two stands in the methodological point of view. The first stand uses the
cross-country approach in order to test the economic theory about export and economic
growth nexus by using rank correlation approach, OLS method, 2SLS and random effect
estimation method. These studies are supported for a positive relationship
between export and economic growth (Kravis, 1970; Michalopoulos and Jay, 1973;
Voivodas, 1973; Balassa, 1978a, b, 1985; Heller and Porter, 1978; Williamson, 1978;
Tyler, 1981; Salvatore, 1983; Kavoussi, 1984; Ram, 1985; Singer and Gray, 1988; Mbaku,
1989; Moschos, 1989; Fosu, 1990, 1996; Otani and Villaneuva, 1990; Alam, 1991; Dodaro,
1991; De Gregorio, 1992; Sheehey, 1992; Sprout and Weaver, 1993; Coppin, 1994;
Amirkhalkhali and Dar, 1995; Yaghmaian and Ghorashi, 1995; McNab and Moore, 1998).
The second stand uses the time series techniques. In the beginning of time series
literature on export, import and growth nexus, the researchers have widely used
Granger’s (1969) and Sims (1972) causality method. The list of studies is included:
Jung and Marshall (1985), Chow (1987), Ram (1987), Ahmad and Kwan (1991),
Bahmani-Oskooee et al. (1991), Ahmad and Harnhirun (1995) and Dodaro (1993).
These studies have failed to support the export-led growth (ELG) and growth-led export
(GLE) because they ignored the cointegration properties in estimation process. Engle
and Granger (1987) point out the additional channel of error-correction term through one
variable cause to other variable in the long run. By including the concept of
error-correction term Bahmani-Oskooee and Alse (1993) found bidirectional relationship
between export and real GDP in the case of nine developing countries. Further Ahmad
and Harnhirun (1995) employed cointegration and error-correction modeling approach
in case of five Asian countries, i.e. Indonesia, Malaysia, Philippines, Singapore and
Thailand, annual data of 1966-1990 are employed. They also found bidirectional causal
relationship between export and economic growth.
In the recent time, many researchers have been used the cointegration methods like
JJ cointegration, vector error-correction method, modified granger causality test, ARDL
approach to cointegration in order to investigate the relationship between the export,
import and economic growth. Ramos (2001) analyze the relationship between export,
import and GDP growth for Portugal by using multivariate Johansen’s procedure he
found bidirectional relationship between GDP and export, GDP and import and no link
between import and export. Awokuse (2005) included beside the term of trade the
change in capital and foreign output shock into the quarterly data of Korea. He tested
causality by using the vector error-correction model (VECM) and the augmented vector
autoregressive (VAR) procedure. The estimation results leads to a confirmation of the
ELG and the GLE. The study reveals that capital, terms of trade and foreign output
shock influence the economic growth. Further Awokuse (2007) test the link between
export, import and GDP by using the granger causality approach. His findings provide
support for the ELG and the GLE for Bulgaria. Conversely, in case of Czech Republic
a unidirectional relationship from export and import to GDP growth is concluded, and Economic
for Poland only the import-led growth (ILG) is validated. These findings are supported growth in China
by using variance decomposition and impulse response functions.
Serge Constant N’Guessan Bi Zambe (2010) examines the relationship between
export, import, exchange rate and GDP growth for the Cote d’Ivoire. By utilizing the
bound testing ARDL approach for cointegration, the findings are a bidirectional link
between export and GDP growth, there by the ELG is confirmed. Katircioglu et al. (2010) 45
test the relationship between trade and economic growth in case of Fiji Island,
Papua New Guinea and Solomon Islands by employing the ARDL approach. They found
real income stimulates a growth in export of Fiji Islands, and ELG and ILG hypothesis
cannot confirm in the Islands and Pacific region. Hye and Siddiqui (2010) test foreign
trade sustainability hypothesis in case Pakistan by employing the rolling window
bound testing and variance decomposition analysis. They concluded that “import
cannot cause the export” but in contrast export effectively cause import, so the foreign
debt is unstable. Further in case of Pakistan Hye and Siddiqui (2011) empirically
examines the relationship between export, terms of trade and economic growth by using
the ARDL and rolling regression method. They suggest export enhance the economic
growth and on the other hand terms of trade impede the economic growth. There is
necessary to promote export in order to improve the terms of trade.
The ELG, ILG and foreign deficit sustainability hypothesis in case of Tunisia has
tested by Hye and Boubaker (2011). They suggested ELG and ILG are valid, and
1 percent increase in export stimulate economic growth by 1.23 percent, and 1 percent
increase in import leads 0.06 percent of economic growth. The bidirectional causality is
recommended in case of export and import, and 1 percent increase in export enhances
import 1.02 percent, and 1 percent increase in export increases import 0.86 percent,
so the foreign deficit is weakly sustainable.
Now we review few studies in case of China: Shan and Sun (1998) investigated the
ELG hypothesis by using the monthly data 1987-1996. They found bidirectional
relationship between export and economic growth. Lie et al. (1997) examined
the long-run relationship between trade openness (exports plus imports) by using the
quarterly data from 1983 to 1995. They found bidirectional relationship between trade
openness and economic growth and suggested higher degree of trade openness
associated with the higher level of economic growth. Narayan and Smyth (2004) used
cointegration and error-correction method in order to check the link between real
export, human capital accumulation and economic growth. They found long-run
relationship only when real export is the dependent variable. Mah (2005), the ELG is
tested using the ARDL model. The results are in favor of a long-run bidirectional
relationship between real GDP and export growth. Conversely, Tang (2006) reviewed
the ELG hypothesis in China with import as an additional variable in the model.
He used two cointegration methods, i.e. ARDL approach to cointegration, and JJ
cointegration methods. The results of two approaches indicate no cointegration
between export, import and real GDP. Herrerias and Orts (2009) examined the
relationship between the import, investment, output and productivity by using the data
1964-2004. They concluded in the long run both import and investment have promoted
output and labor productivity but on the other hand neither investment causes import
nor import causes investment.
JCEFTS Methodology
The study uses annual time series data from 1978 to 2009 and data have taken from the
5,1 World Bank, world development indicators. The GDP[3], export of goods and services
and import of goods and services are measured in dollars at constant prices. For
econometric estimation all series are transformed into natural logarithm form. The
relationship between export, import and economic growth by examining the ELG,
46 GLE, ILG, growth-led import (GLI) and foreign deficit sustainability hypothesis. The
ELG and GLE hypothesis is tested by estimating the causal link between the economic
and export growth (equations (1) and (2)). The ELG hypothesis suggests that export
growth enhances economic growth through such means as facilitating the utilization of
economies of scale by specialization in production and promoting the distribution of
technical knowledge (Helpman and Krugman, 1985). Bhagwati (1988) has proposed
GLE hypothesis. He stated economic growth induce both supply and demand. The
neoclassical trade theory also supported by Bhagwati (1988) argument as export
enhances the economic growth and thus economic growth increases the level of skill
and technology. Thus, increased efficiency creates the comparative advantage for the
country that endorses export:
Y t ¼ a0 þ a 1 X t þ ct ð1Þ
X t ¼ b0 þ b1 Y t þ n t ð2Þ
In this study, ILG and GLI hypothesis is tested by estimating the causal relationship
between the import and economic growth (equations (3) and (4)). In the same way Deme
(2002)[4], Sato and Fukushige (2007)[5] and Katircioglu (2010)[6] have estimated the
ILG and GLI hypothesis:
Y t ¼ u 0 þ u 1 M t þ ct ð3Þ
M t ¼ w0 þ w1 Y t þ n t ð4Þ
Husted (1992) provides simple theoretical model of import and export association.
He has started with the current budget constraint:
C t ¼ Y t þ Bt 2 I t ð1 2 rÞBt ð5Þ
where Ct, Yt, Bt, It and r, respectively, confer current consumption, output, investment
and current interest rate in the international market. Husted has imposed several
assumptions on equation (5) in order to derive an empirically testable model which is as
follow:
X t ¼ l0 þ l1 M t þ ct ð6Þ
Arize (2002) tested the equation (6) alternatively by as follow:
M t ¼ g0 þ g1 X t þ nt ð7Þ
The international budget constraint is stable when bidirectional cointegration exist
between the export (X) and import (M), and there respective coefficients is equal to 1 or
greater than 1. Otherwise international budget constraint is unstable in the economy.
In the empirical study it is important to determine the order of integration to choose
the appropriate estimation method. This study aims to utilize the Phillips-Perron (PP)
unit root test to investigate the level of integration. The important long-run relationships
among the different combinations are investigated by using the ARDL method. The Economic
ARDL approach is involved to estimate the following unrestricted VECM by assuming
that Ln Z and Ln W are two variables:
growth in China
X
r X
r
DLnðZ Þt ¼ l0 þ ui DLnðZ Þt2i þ li DLnðW Þt2i þ a1 LnðZ Þt21
i¼1 i¼0
ð8Þ 47
þ a2 LnðW Þt21 þ n 1t
X
r X
r
DLnðW Þt ¼ g0 þ 4i DLnðW Þt2i þ gi DLnðZ Þt2i þ b1 LnðW Þt21
i¼1 i¼0
ð9Þ
þ b2 LnðZ Þt21 þ n2t
where Ln Z represents the natural log of the dependent variable, Ln W shows the natural
log of independent variable in equation (8) and reversely in equation (9), i.e. Ln W
represents the dependent variable, Ln Z shows independent variable and n1t and n2t are
the error-correction term (assumes that error-correction term is mean 0 and finite
covariance matrix). The overall F- and t-statistics are used to determine the presence of
long-run relationship. The Pesaran et al. (2001) has calculated two sets of critical values
at 1, 5 and 10 percent levels of significance (i.e. I(0) lower bound critical value and
I(1) upper bound critical value). But this study employs Narayan (2005)[7] critical values
for F-statistic and Pesaran et al. values for t-statistics. The decision of long-run
relationship is taken by following such rule: if the calculated F- and t-statistics above the
upper critical bounds value, then the H0 (null hypothesis) is rejected and we conclude the
long-run relationship exist and in contrast if the F- and t-statistics are below the lower
bound critical value, we conclude no cointegration. The inconclusive decision we make
if the both statistics fall between the lower and upper bounds critical values.
The null hypothesis of equation (8) is h H 0 ¼ a1 ¼ a2 ¼ 0i this is denoted as
F LnðZ t Þ h LnðZ t ÞjLnðW t Þi, the null hypothesis of equation (9) is h H 0 ¼ b1 ¼ b2 ¼ 0i this is
represented by F LnðW t Þ h LnðW t ÞjLnðZ t Þi. The t-statistic is tested ui ¼ 0 in equation (8)
and 4i ¼ 0 is equation (9). After that we estimate the ARDL based long-run coefficients
on those combination that show the long-run association. In the following way we
estimate the long-run coefficients:
Xr XP
LnðZ Þt ¼ b0 þ w1j LnðZ Þt2j þ b1j W t2j þ h1t ð10Þ
j¼1 j¼0

X
r X
P
LnðW Þt ¼ s0 þ w2j LnðZ Þt2j þ b2j W t2j þ h2t ð11Þ
j¼1 j¼0

The orders of lags in the ARDL model are selected by minimizing the Schwarz Bayesian
criterion and Akaike information criterion. Next we perform standard modify Granger
causality test augmented with a lagged error-correction term. The Granger
representation theorem suggests that there will be Granger causality in at least one
direction if there exist a cointegration relationship among the variables in equations (8)
and (9), providing that they are integrated order of one. Engle and Granger (1987)
causation that the Granger causality test, which is conducted in first difference
JCEFTS via a vector autoregression, it will be misleading in the presence of cointegration.
Therefore, an inclusion of an additional variable to the VAR system, such as the
5,1 error-correction term, would help us to capture the long-run causal direction. To this end,
an augmented form of Granger causality test involving the error-correction term is
formulated in a bivariate rth order VECM, as follow:
" # " # " #" # " #
48 DZ t G1 Xr n11i n12i n13i Dln Z t2i V1
¼ þ þ ½EC t21

DW t G2 i¼1
n21i n22i n23i Dln W t2i V2
" #
c1 ð12Þ
þ
c2

ECt2 1 is the error-correction term, which is derived from the long-run relationship.
The Granger causality test may be applied to equation (12) as follows:
.
by checking statistical significance of the lagged differences of the variables for
each vector; this is a measure of short-run causality; and
.
by examining statistical significance of the error-correction terms for the vector
that indicates long-run causal direction.

Empirical results
This empirical study employs PP unit root test in order to determine the level of
integration. The unit root results in Table I are confirmed that Ln(Y), Ln(X) and Ln(M)
are integrated order 1 or I(1).
After confirming the order of integration, now the long-run robustness is investigated
by using the ARDL approach to cointegration. Table III shows the results

Ln(Y) Ln(X) Ln(M)

Statistical level
tT (ADF) 22.101 2 1.733 2 1.772
tm (ADF) 0.064 0.775 0.639
t (ADF) 3.482 0.963 2.713
tT (PP) 22.777 2 1.129 2 1.521
tm (PP) 0.547 1.131 1.174
t (PP) 15.851 3.972 5.742
Statistics (first difference)
tT (ADF) 23.875 * * 2 3.502 * * * 2 4.811 *
tm (ADF) 24.026 * 2 3.077 * * 2 4.532 *
t (ADF) 24.714 * 2 2.254 * * 2 2.672 *
tT (PP) 243.803 * 2 3.683 * * 2 5.765 *
tm (PP) 23.043 * * 2 3.454 * * 2 4.541 *
t (PP) 213.072 * 2 2.303 * * 2 3.443 *
Notes: Y represents the real GDP; X is the real exports; M is the real imports; all of the series are in
natural logarithm form; tT is presented model of with a drift and trend; tm is the model with drift and
Table I. without trend; t is the most restricted model without drift and trend; tests for unit root have carried out
Unit root test results in E-VIEWS 7.O; ADF, augmented Dickey-Fuller
of cointegration between Y, X and M in case of China under three different scenarios that Economic
proposed by Pesaran et al. (2001), that are without deterministic trends (FIII); with growth in China
restricted deterministic trends (FIV) and with unrestricted deterministic trends (FV).
The important lower and upper bound critical values for F-statistics are taken from
Narayan (2005) and critical values for t-statistics are taken from Pesaran et al. (2001),
both critical values (F- and t-statistics) are shown in Table II.
Table III indicates the results of bound testing and long-run coefficients. In first 49
combination of Ln Y and Ln X, when Ln Y dependent variable the long-run relationship
exists that confirms export affects on economic growth (ELG). The long-run coefficient
indicates that 1 percent increase in export enhances economic growth by 0.591 percent.
In alternatively when export is dependent variable the long-run relationship is also
presented that confirms the GLE hypothesis. The 1 percent increase in economic growth
is associated by 1.635 percent increase in export. The present finding is equal to the
theoretical hypothesis of Helpman and Krugman (1985) and Bhagwati (1988),
and also the earlier empirical findings of Shan and Sun (1988), and Mah (2005) in case
of China.
Next in second combination of Ln Y and Ln M: this study is supported the ILG and
GLI hypothesis on the basis of results. The results in Table III confirm the existence
bidirectional long-run relationship between import and economic growth, a 1 percent
increases in import stimulate economic growth by 0.621 percent and on the other hand
a 1 percent increase in economic growth enhances 1.392 percent import. The present
empirical results is equal the findings of Sato and Fukushige (2007) in case of
North Korea. It is against the Tang (2006) findings in case of China.
The sustainability of foreign trade deficit hypothesis is tested through the export
and import cointegration. The results in Table III suggest the bidirectional long-run
relationship between the export and import. The occurrence of long-run bidirectional
relationship is not sufficient to draw conclusion about the sustainability of foreign
trade deficit. It is important to estimate the respective coefficient of export and import
equations. The long-run coefficients (Table III) show that a 1 percent increase in import
leads the exports 1.322 percent and on the other hand 1 percent increase in export leads
the import by 0.975 percent. Thus, we conclude sustainability of foreign trade deficit

0.10 0.05 0.01

K¼2 I(0) I(1) I(0) I(1) I(0) I(1)

FIII 3.44 4.47 4.27 5.47 6.18 7.78

FIV 3.77 4.54 4.54 5.42 6.43 7.51
FV 4.58 5.60 5.55 6.75 7.98 9.41
tIII 2 2.57 2 3.21 22.86 23.53 2 3.43 2 4.10
tV 2 3.13 2 3.63 23.41 23.95 2 3.96 2 4.53
Notes: k is the number of regressors for dependent variable in ARDL models; FIII represents the
F-statistic of the model with unrestricted intercept and no trend; FIV represents the F-statistic of the
model with unrestricted intercept and restricted trend; Fv represents the F-statistic of the model with
unrestricted intercept and trend; tIII and tv are the t-ratios for testing ui ¼ 0 in equation (8) and 4i ¼ 0 Table II.
is equation (9), respectively, without and with deterministic linear trend Critical values for ARDL
Source: Narayan (2005) for F-statistics and Pesaran et al. (2001) for t-statistics modeling approach
JCEFTS
Without
5,1 determintic
With determintic trends trends
Variable FIV FV tV FIII tIII Conclusion (H0) Long-run estimated equation

(1) Y and X
FY (ln Y/ln X)
50 r¼2 6.221a 9.202a 24.225a 0.608c 21.091c Rejected Ln Y ¼ 13.895 * * * þ 0.591 * *Ln X
r¼3 5.573a 7.419a 23.507b 1.711c 20.982c
r¼4 4.666a 6.647a 23.526b 0.796c 1.218c
r¼5 8.502a 12.647a 25.026a 0.091c 20.296c
FX (ln X/ln Y)
r¼2 2.319c 2.037c 21.921c 2.933c 21.752c Rejected Ln X ¼ 218.228 * * * þ 1.635 *Ln Y
r¼3 2.025c 2.599c 22.279c 2.956c 22.238c
r¼4 7.951a 10.951a 24.674a 9.335a 24.115a
r¼5 2.128c 3.119c 22.212c 2.971c 22.413c
(2) Y and M
FY (ln Y/ln M)
r¼2 5.247a 7.817a 23.949a 0.297c 20.739c Rejected Ln Y ¼ 15.492 þ 0.621 * * *Ln M
r¼3 7.892a 11.821a 24.861a 0.151c 20.532c
r¼4 4.041b 4.011c 22.777c 1.891c 21.077c
r¼5 4.304b 6.365a 23.391b 0.715c 21.188c
FY (ln M/ln Y)
r¼2 3.728c 4.786b 22.539c 3.171c 22.241c Rejected Ln M ¼ 2 13.198 * þ 1.392 *Ln Y
r¼3 2.968c 2.331c 21.838c 4.607a 22.163c
r¼4 3.901b 2.334c 22.142c 5.803a 22.079c
r¼5 2.519c 3.451c 21.324c 2.947c 22.276c
(3) X and M
FX (ln X/ln M)
r¼2 2.885c 2.412c 22.196c 4.216b 22.163c Rejected Ln X ¼ 27.334 þ 1.322 *Ln M
r¼3 3.006c 3.285c 22.475c 4.226b 22.565c
r¼4 1.631c 2.115c 21.557c 2.549c 22.224c
r¼5 4.666a 6.985a 22.018c 7.411a 23.725a
FM (ln M/ln X)
r¼2 8.108a 12.156a 24.841a 2.082c 22.041c Rejected Ln M ¼ 0.547 þ 0.975 * Ln X
r¼3 3.984b 5.954a 23.445b 2.266c 22.102c
r¼4 5.127a 7.056a 23.397a 1.477c 21.702c
r¼5 10.985a 15.621a 25.512a 3.754b 22.281c
Notes: Significant at: *1, * *5 and * * *10 percent levels; athe calculated above the upper bound; bthe
value calculated value between the lower and upper bound; cthe calculated value less then lower
bound; the Schwartz criteria is used to choose the optimum number of lags that is important for
cointegration test; H0 shows the no cointegration hypothesis; FIV represents the F-statistic of the model
with unrestricted intercept and restricted trend; FV represents the F-statistic of the model with
Table III. unrestricted intercept and trend; FIII represents the F-statistic of the model with unrestricted intercept
Bound testing analysis and no trend; tIII and tV are the t-ratios for testing ui ¼ 0 in equation (8) and 4i ¼ 0 is equation (9),
and long-run coefficients respectively, without and with deterministic linear trend

because the import causes export to increase more than proportionately, while export
causes import to increase less than proportionately.
This study also employs the modified granger causality test (results in Table IV) to
determine the direction of long- and short-run causal direction. The results indicate
that there is bidirectional causal relationship between economic growth and export,
economic growth and import, and export and import in the long run. Further in the
short run only economic growth causes the import. The results of modified granger
causality is supported the findings of ARDL approach (Figure 3).
Conclusion Economic
This study examines the relationship between the export, import and economic growth growth in China
in case of China by using the ARDL approach to cointegration and modify granger
causality test. This investigation is concluded three key findings on the basis of
empirical evidence: first, there is bidirectional long-run/causal relationship exists
between export and economic growth, and export leads the economic growth and also
economic growth leads export. The long-run elasticity of economic growth with 51
respective to export is 0.591, and long-run elasticity of export with respect to economic
growth is 1.635. This finding is equal to the theoretical hypothesis of Helpman and
Krugman (1985) and Bhagwati (1988), and also the earlier empirical findings of Shan and
Sun (1988), and Mah (2005) in case of China. Second, the bidirectional relationship
between the import and economic growth confirms the validity of ILG and GLIs
hypothesis. The long-run elasticity of economic growth with respect to import is 0.621,
and long-run elasticity of import with respect to economic growth is 1.392. The present
empirical results is equal the earlier findings of Sato and Fukushige (2007) in case of
North Korea and, it is against the Tang (2006) findings in case of China. Last foreign
deficit sustainability hypothesis is investigated through the association between export
and import. The result indicates that bidirectional long-run association between export
and import. The long-run elasticity of export with respect to import is 1.322 and long-run
elasticity of import with respect to export is 0.975. So, foreign trade deficit is almost
sustainable in the case of China because the import causes export to increase more than
proportionately, while export causes import to increase less than proportionately.

Long-run
Short-run causality results causality results Decision of Decision of
F-statistics t-statistics (pro.) short-run long-run
Ln (Y) Ln (X) Ln (M) ECM (21) causality causality

Y and X
Ln (Y) – 1.279 (0.297) – 21.898 (0.071) No Y$X
Ln (X) 0.081 (0.923) – 22.947 (0.007)
Y and M
Ln (Y) – – 1.243 (0.307) 22.898 (0.008) Y$M Y$M
Ln (M) 11.513 (0.000) – – 22.567 (0.017)
X and M
Ln (X) – – 0.525 (0.598) 20.266 (0.018) No X$M Table IV.
Ln (M) – 0.689 (0.512) – 23.504 (0.001) Granger causality tests

Exports

Economic
Growth

Imports Figure 3.
Trade and growth in China
JCEFTS Notes
5,1 1. The World Bank (2010).
2. Different World Bank press release.
3. Economic growth is proxied by GDP.
4. In case of Nigeria.
52 5. In case of North Korea.
6. In case of Fiji Islands, Papua New Guinea and Solomon Islands.
7. Because it is determined critical values more suit for the small sample.

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Further reading
Pesaran, M.H., Shin, Y. and Smith, R.J. (1999), “An autoregressive distributed lag modelling
approach to cointegration analysis”, in Strom, S. (Ed.), Econometrics and Economic Theory
in 20th Century: The Ragnar Frisch Centennial Symposium, Cambridge University Press,
Cambridge.

Corresponding author
Qazi Muhammad Adnan Hye can be contacted at: qazi.adnan@iobm.edu.pk

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