Eurasian Economic Review (2023) 13:127–144

https://doi.org/10.1007/s40822-023-00225-z

ORIGINAL PAPER

Do currency manipulations hurt US bilateral trade balance?

Muhammad Aftab1 · Mohsen Bahmani-Oskooee2 · Huseyin Karamelikli3

Received: 6 October 2022 / Accepted: 26 February 2023 / Published online: 10 April 2023
© The Author(s) under exclusive licence to Eurasia Business and Economics Society 2023

Abstract
Currency manipulations, the intentional intervention in the foreign exchange mar-
ket by a country’s government or central bank, have been a contentious issue in
international trade. However, empirical evidence on the matter is scarce. This study
aims to fill this gap by investigating the effect of currency manipulations on the US
bilateral trade balance with its major trading partners over a long-term period of
2000Q4 to 2020Q2. By using a novel currency manipulation index based on the US
Treasury-defined variables and a combination of time series and panel cointegration
approaches, this study uses a dataset of 21 major trading partners of the US. The
analysis shows that currency manipulations have a statistically significant negative
effect on the US bilateral trade balance with some country-level heterogeneity. The
study provides new insights on the role of currency manipulations in international
trade and implies that the findings have significant policy implications. By provid-
ing evidence of the detrimental effect of currency manipulations on trade balance,
this study supports the argument for the need of international agreements and regu-
lations to discourage such practices and promote fairness in global trade.

Keywords Currency manipulations · Currency devaluations · US bilateral trade ·

International trade

Mohsen Bahmani-Oskooee
bahmani@uwm.edu
Muhammad Aftab
maftab@comsats.edu.pk
Huseyin Karamelikli
huseyinkaramelikli@karabuk.edu.tr

1
Department of Management Sciences, COMSATS University, Islamabad, Pakistan
2
Center for Research on International Economics, Department of Economics, The University
of Wisconsin-Milwaukee, Wisconsin, US
3
Department of Economics, Karabuk University, Karabuk, Turkey

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128 Eurasian Economic Review (2023) 13:127–144

JEL classification F31 · O24 · F13 · B17

1 Introduction

In 2010 Guido Mantega, a Brazilian Finance Minister noted that “The world is in an
international currency war as governments manipulate their currencies to improve
their competitiveness” (Dominguez, 2020). Currency manipulation is a decline in
a currency value by the intentional intervention of a country to make its imports
expensive and exports cheaper thus improving the trade balance. In the words of
Mattoo and Subramanian (2009, p. 1139), ‘An undervalued exchange rate is both an
import tax and an export subsidy and is hence the most mercantilist policy imagin-
able’. Some stylized facts show that currency manipulations cost two million jobs in
the USA. Estimates show that for every dollar spent on currency manipulation, the
current account improves by 65 cents1. Although China is at the center stage when it
comes to currency manipulations, there are many other countries from the develop-
ing as well as the developed world, committing this act2 (Gagnon, 2013; Staiger &
Sykes, 2010).
Given the progress, world economies have made in economic integration glob-
ally, it is worth researching, how currency manipulations relate to trade balance. The
literature is abundant on how exchange rate changes affect trade. Starting with the
seminal theoretical work by Magee (1973) and later empirical examination by Bah-
mani-Oskooee (1985), there are vast studies that establish the effect of exchange rates
on trade3. However, these studies investigate the exchange rate change effects while
ignoring currency manipulations.
The empirical evidence on the effects of currency manipulations on trade bal-
ance is scarce. This study aims to fill this gap by investigating the effect of currency
manipulations on the US bilateral trade balance with its twenty-one major trading
partners over a long-term period of 2000Q4 to 2020Q2. This research contributes to
the literature in at least three ways: firstly, by providing empirical evidence on the
topic, which is scarce in the extant literature; Secondly, by creating a novel currency
manipulation index based on the US Treasury-defined variables for a comprehensive
set of twenty-one US trading partners. Finally, it attempts to bring research rigor
by using time series and panel approaches along with disaggregated analysis on the
effect of each currency manipulation index variable. The study’s unique and long-
term dataset, combined with the panel of major trading partners, make it a valuable
contribution to the literature on this topic.

1
The United States trade deficit has surged from $ 200 billion to $ 500 billion per year due to currency
manipulations (Bergsten & Gagnon, 2012). U.S. department of treasury 2022 also notes widening current
account deficit.
2
The list includes countries like; Japan, Switzerland, Israel, Singapore, Taiwan, Malaysia, Thailand,
China, Norway, Russia, and Saudi Arabia.
3
See Bahamni-Oskooee and Hegerty (2010) for a comprehensive survey on it.

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Eurasian Economic Review (2023) 13:127–144 129

The rest of the paper is organized as follows. The next section reviews related lit-
erature that is followed by the method and data in Section 3. Section 4 provides and
discusses estimation results that is followed by our concluding remarks in Section 5.

2 Literature review

This section provides the research theory and related literature succinctly.

2.1 Theory

Magee (1973) notes that currency devaluations by a country increase its trade bal-
ance in the long run. This happens owing to an increase in the competitiveness in the
foreign market that makes the devaluating country’s exports cheap and its imports
expensive resulting in overall improvements in the trade balance. This theoretical
underpinning motivates currency manipulations. One can understand easily what
would happen when currency manipulation takes place through this example. Sup-
pose there are two countries, A and B who trade with each other, and country A does
currency manipulations. It will result in country B’s exports becoming expensive to
country A and country A exports to country B would have a competitive advantage.
This way country A makes an unfair economic benefit. Figure 1 elaborates on the cur-
rency manipulation process of country A and its outcomes for the rest of the world.
Under the IMF framework, currency manipulator is identified on the following
three combined benchmarks: a. Does country A have a trade surplus in a set six-
month period? Does the country add foreign reserves in the same six-month period?
Are country A’s foreign reserves more than enough bar of three months’ imports bill?
However, there is an absence of an exact indicator to gauge a country’s level of cur-
rency manipulation.

Fig. 1 The process and the outcomes of currency manipulation. (Retrieved from https://www.ameri-
canautomakers.org/currency-manipulation-101#:~:text=Currency%20manipulation%20is%20a%20
policy,gain%20an%20unfair%20competitive%20advantage.)

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2.2 Related empirical literature

With the seminal empirical work of Bahmani-Oskooee (1985), related literature

that supports the effects of currency changes on the trade balance is quite volumi-
nous. Bahmani-Oskooee and Hegerty (2010) provide a comprehensive review of the
related literature. They note that the effect of currency changes in time paths can be
noted through the J-curve. J-curve suggests that after the currency depreciation or
devaluation, the trade balance worsens at the start but improves in the long run. They
note that J-curve has been studied extensively and reports significant patterns in the
literature in terms of data aggregations such that early research on the topic used
aggregated data between a country and the rest of the world. Later on, suspecting the
aggregation bias, studies use the bilateral trade data. This transition provided more
support to the J-curve phenomenon and motivated the subsequent studies to extend
this line of research. Therefore recent studies have further disaggregated the bilateral
trade data at the industry and commodity levels.
However, the above literature does not differentiate the currency devaluations that
are done intentionally by a country versus the currency depreciations that happen due
to the market forces of demand and supply. The prior is related to currency manipula-
tion while the latter is a normal market-based phenomenon. The extant literature is
scarce on measuring currency manipulations. Therefore, Staiger and Sykes (2010)
note that it is difficult to examine the effects of currency manipulations on trade quan-
titively which make it difficult for the World Trade Organization dispute resolution
system to work.
This research fills an important gap in the literature by gathering a currency
manipulation index based on the criteria set by the US Department of the Treasury
regarding the trading partner on current account balance surplus, trade surplus, and
foreign exchange market interventions, and subsequently, its effects on the US bilat-
eral trade with its important trading partners.

3 Method and data

3.1 Research model and estimation approach

This research follows Rose and Yellen’s (1989) model that theoretically defines the
bilateral trade balance as a function of the economic activity of two trading part-
ners and the real bilateral exchange rate. We modify the specification to incorporate
the currency manipulation outlined in Eq. 1 resembling with Bahmani-Oskooee and
Aftab (2022) who study the effect of the free trade agreement on bilateral trade.

LnBT it = αo + α1F C t + α2CM it + α3LnYtUS + α4LnYti + α5LnREX it + t (1)

Where BT it is the US bilateral trade balance with trading partner i at time t (for the
list trading partners see Table 1). It is defined as the ratio of US imports from trading
partner i divided by the US exports to trading partner i. YUS and Yi are the GDPs of
the US and its trading partner i respectively. REXi is the real bilateral exchange rate

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 Table 1 Unit root analysis
Panel A: At level Panel B: At difference
Partner i BTi YUS Yi REXi BTi YUS Yi REXi
Argentina -1.34(0.61) -2.13(0.23) -1.55(0.50) -1.6(0.48) -7.77(0.00)*** 4.09(0.00)***^ -4.29(0.00)*** -5.96(0.00)***
Australia -2.14(0.23) - -2.71(0.08)* -2.22(0.2) -6.41(0.00)*** - -7.01(0.00)***^ -6.39(0.00)***
Brazil -1.47(0.54) - -1.73(0.41) -1.48(0.54) -9.54(0.00)*** - -2.92(0.05)** -5.49(0.00)***
Canada − 0.97(0.75) - -1.8(0.38) -1.39(0.58) -8.73(0.00)*** - -7.95(0.00)***^^ -6.85(0.00)***
China -1.55(0.50) - -3.87(0.00)*** -1.27(0.64) -8.81(0.00)*** - -21.23(0.00)***^ -3.28(0.02)**
Germany -2.56(0.11) - -1.65(0.45) -2.4(0.14) -2.89(0.05)** - -7.66(0.00)***^ -6.26(0.00)***
Hong Kong -1.17(0.68) - -2.12(0.23) -1.26(0.64) -4.96(0.00)*** - -3.16(0.03)** -24.79(0.00)***^
Eurasian Economic Review (2023) 13:127–144

India -1.84(0.35) - -1.58(0.49) -1.84(0.36) -4.13(0.00)*** - -5.3(0.00)***^ -5.76(0.00)***

Indonesia -2.06(0.26) - -2.2(0.21) -2.73(0.07)* -12.74(0.00)*** - -14.88(0.00)***^^ -6.57(0.00)***
Italy -2.37(0.15) - − 0.47(0.89) -2.5(0.12) -14.16(0.00)*** - -11.59(0.00)***^^ -6.01(0.00)***
Japan -2.01(0.28) - -2.21(0.20) -1.67(0.44) -8.69(0.00)*** - -3.55(0.01)*** -3.86(0.00)***
Korea -3.68(0.01)** - -2.67(0.08)* -2.91(0.05)** -10.71(0.00)*** - -5.06(0.00)*** -6.99(0.00)***
Mexico -2.3(0.17) - -1.65(0.45) − 0.35(0.91) -11.05(0.00)*** - -4.31(0.00)***^ -7.38(0.00)***
Russia -4.24(0.00)*** - -2.85(0.06)* -2.12(0.24) -8.64(0.00)*** - -3.67(0.00)*** -8.09(0.00)***
Singapore -2.71(0.07)* - -1.66(0.45) -1.22(0.66) -7.9(0.00)*** - -7.97(0.00)***^ -6.53(0.00)***
South Africa -3.89(0.00)*** - − 0.87(0.79) -1.18(0.68) -12.38(0.00)*** - .-3.85(0.00)***^^^ -6.48(0.00)***
Switzerland 2.04(0.99) - -1.45(0.55) -2.39(0.14) -8.55(0.00)*** - -5.66(0.00)***^ -6.71(0.00)***
Taiwan -4.68(0.00)*** - -1.84(0.36) -3.73(0.00)*** -7.89(0.00)*** - -4.89(0.00)*** -7.11(0.00)***
Thailand -2.99(0.04)** - -2.09(0.25) -1.75(0.4) -10.96(0.00)*** - -9.96(0.00)*** -6.2(0.00)***
Turkey -1.00(0.74) - − 0.93(0.77) − 0.75(0.83) -9.44(0.00)*** - -6.06(0.00)*** -7.52(0.00)***
Vietnam -5.09(0.00)*** - − 0.97(0.76) -1.09(0.72) -7.97(0.00)*** - -6.85(0.00)*** -5.67(0.00)***
*** ,**, * show the significance at the 1%, 5% and 10% respectively. ^, ^^, ^^^ refers to stationary at second difference, third difference, and fourth difference respectively.
Abbreviations: BT(bilateral trade balance with the US), Y(GDP of US), Y*(GDP of trading partner, REX (real exchange rate)

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defined as number of units of trading partner i’s currency per unit of the US dollar in
real term. An increase in the REXi variable implies an appreciation of the US dollar
and a decrease implies a depreciation of the US dollar. FC is a dummy variable that
captures the effect of the global financial crisis and CMi is the currency manipula-
tion index of partner i. It measures the currency manipulation level of the US trading
partner i. The expected sign of α1 can be negative or positive subject to the extent
financial crisis influenced imports and exports. If it has dampened US imports (trad-
ing partner exports) more than its exports, the effect can be expected to be negative
and vice versa. The estimate of α2 is expected to be positive if the trading partner’s
act of currency manipulation improves its exports to the US more than its imports
from the US. Thus, the positive sign will hurt the US bilateral trade balance with its
trading partner. We expect the signs attached to the estimates of α3 and α4 to be posi-
tive and negative respectively in case an increase in US economic activity improves
its imports and an increase in US trading partner economic activity increases US
exports. Finally, α5 can be positive if depreciation in the US dollar decreases imports
and improves exports.
To estimate (1), we use the ARDL approach to cointegration as it is flexible to
mix order cases (i.e. I(0) and I(1)) which is an issue with these research variables as
notable in Table 1. Following Pesaran et al. (2001), the error correction specification
of (1) is as:

∆LnBTti = ψ + η0LnBTt−1
i
+ η1 LnYt−1
US
+ η2 LnYt−1
i
+ η3LnREXt−1 i
+
p q m
  
β1j ∆LnBTt−j
i
+ β2j ∆LnYt−h
US
+ β3j ∆LnYt−h
i
+
j=1 h=0 h=0
n
(2)

β4j ∆LnREXt−h
i
+ γ1F Ct + γ2 CMti + et
h=0
∀t > max{p, q, m, n}.

The estimate of (2) through Ordinary Least Square provides the short-run and long-
run estimates.4 One can gather short-run estimates from the coefficients attached to
the first differenced variables and long-run estimates from the coefficients attached
to the level-lagged variables by normalizing each on η0 . For the validity of long-run
estimates, Pesaran et al. (2001) recommend the presence of cointegration that can
be established through the joint significance of lagged-level variables based on the
F-test. Alternatively, one can establish cointegration if the error correction term is
negatively significant (Banerjee et al., 1998). It is calculated as follows:
η1 US η2 η3
ECMt−1 = LnBT it−1 − Y − LnYit−1 − LnREX it−1 (3)
η0 t−1 η0 η0

4
Note that since this model is estimated using quarterly data over 2000Q4-2020Q2, t > j and h always.

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3.2 Variables definition and data sources

This study takes quarterly data over the period 2000Q4–2020Q2 to carry out estima-
tion. The data come from a)- IMF Direction of Trade Statistics (DOTS), b)-Interna-
tional Financial Statistics, c)- The Central Bank of Argentina, d)- the Organization
for Economic Co-operation and Development, e)- The World Bank Global Economic
Monitor (GEM), f)- Greenberg Center for Geoeconomic Studies.
Here is a brief description of the variables.
BTi is the bilateral trade balance between the US and its trading partner i (the ratio
of US imports from trading partner i over its exports to trading partner i). The data
come from source a.
FC captures the financial crisis effect such that it takes a value of one during the
crisis period (September 2007 to March 2009) and zero otherwise.
CMi is a Currency manipulation index to gauge the level of currency manipulation
by the US trading partneri. This index uses the three criteria of the US Department
of the Treasury regarding the trading partner which are; (1) Current account balance
surplus over 2% of GDP (2) More than 20 billion trade surplus (3) Purchase of USD
over 2% of GDP in the foreign exchange market in six of the last twelve months.
Each of these criteria takes a value of 1 when a trading partner fulfills it and a value
of zero, otherwise. The currency manipulation index is the sum of these three criteria.
Thus, the index can take a maximum value of three and a minimum value of zero.
A value of three shows a high level of currency manipulation by the trading partner
and a value of zero depicts no currency manipulation. The data come from source f.
YUS is the real gross domestic product of the US. The data come from source b.
Yi is the real gross domestic product of the US’s trading partner i. The data come
from sources b, d, and e.
REXi is the real exchange rate defined as trading partner currency per unit of US
dollar (USD) such that an increase in value shows appreciation of the US dollar. The
data come from sources b,c, and e.

4 Results

First, this study examines the unit root properties of the variables. Although ARDL
is flexible to mix integration cases like I(0) and I(1), we do this exercise to rule out
any I(2) case. The results reported in Table 1 show that some variables are stationary
at level but many are stationary at first difference. There also are some cases of I(2)
and above. In such cases, they are differenced such that they all are stationary at I(1).

4.1 ARDL estimates

To operationalize the ARDL approach we take a maximum of eight lags and use
Akaike’s Information Criterion (AIC) to select the optimal model. The long-run esti-
mates are reported in Table 2. We discuss first our main variable of interest. Notably,
the coefficient of currency manipulation is significant in five cases (i.e. Canada, Ger-
many, Japan, Korea, and Russia). Out of these five cases, it is positively significant

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in four cases. The positive coefficient implies that currency manipulations help these
economies to export more to the US. Thus disfavoring the US trade balance. On the
other hand, the negative coefficient which is the only one in the case of Japan implies
that currency manipulations by Japan discourage its exports to the US. This way
favors the US trade balance.
The effect of the financial crisis is negatively significant in the case of Germany,
Korea, Mexico, Singapore, and Taiwan. This implies that the financial crisis has hurt
the exports of these economies to the US. On the hand, the effect of the financial
crisis is positive in the case of Argentina which may imply that the effect of the crisis
has hurt Argentina’s imports from the US more than its exports to the US.
Moving to other control variables, the effect of US economic activity is positively
significant in the majority of significant cases implying that an increase in the US
economic activity encourages more imports. Similarly, the effect of US trading part-
ners’ economic activity is dominantly negative in the significant cases that support
the view that trading partners imports more from the US when their economic activ-
ity shows improvements. The effect of the real exchange rate which is a measure of
relative prices is positive in all the significant cases that signify that appreciation of
the US dollar increases its imports from its trading partners and decreases its exports
to them.
Above estimates, validity requires a diagnostic check. We use a battery of tests as
reported in Panel B of Table 2. Cointegration is established in all the models where
the effect of currency manipulations is significant except in Germany based on the
F-test of joint significance based on Narayan’s (2005, Table CI-Case III, p.1988)
critical values. However, cointegration also is established based on an alternative test,
ECM if the rate of adjustment is negatively significant in these cases (Banerjee et al.,
1998). Other diagnostics show the models are auto-correlation free, correctly speci-
fied and coefficients are stable (based on CUSUM or CUSUMSQ) in these cases.
These diagnostics establish the meaningfulness of estimates to draw implications.

4.2 Disaggregated analysis of currency manipulations

Next, we conduct an estimation disaggregating the currency manipulation index into

its three constituting criteria of currency manipulation and examine the effect of each
criterion on the US bilateral trade balance with the selected trading partners. It should
be noted, estimates could not be gathered for some trading partners due to modeling
constraints like when the criterion has one (zero) value throughout the sample period.
The results are reported in Tables 3, 4 and 5.

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 Table 2 ARDL estimates considering currency manipulation index
Panel A: Long-Run Estimates Panel B: Diagnostic Statistics
Partner i C. FC CMi Y Yi REXi F ECM LM RESET Adj. CS
R2 (CS2)
Argentina 11.51(2.37)** 0.17(2.42)** 0.03(0.96) 5.36(0.88) -2.27(8.39)*** 0.51(3.42)*** 6.03 − 0.44(5.05)*** 3.29 0.51 0.91 S(S)
Australia 1.83(1.27) 0.026(0.59) 0.07(0.59) 40.12(1.97)** − 0.76(2.37)** 2.66(1.19) 2.28 − 0.19(3.11)*** 0.40 1.95 0.77 S(S)
Brazil 12.78(4.07)*** − 0.05(1.17) − 0.004(0.12) 21.51(3.54)*** -2.32(7.18)*** 0.05(0.29) 5.98 − 0.44(5.01)*** 0.13 0.06 0.92 S(S)
Canada − 0.03(2.81)*** 0.01(1.14) 0.04(3.64)*** 9.82(3.18)*** 20.38(4.68)*** 0.5(3.9)*** 10.88 − 0.29(6.8)*** 0.34 0.0005 0.94 S(S)
China − 0.3(0.17) − 0.03(0.27) 0.03(0.87) 216.84(0.48) -129.65(0.47) 1.54(0.24) 2.67 − 0.07(3.36)*** 0.97 1.29 0.92 S(S)
Germany − 0.11(1.33) − 0.04(1.9)* 0.11(3.42)*** 5.22(0.38) -12.35(1.5) − 0.1(0.22) 3.34 − 0.13(3.79)*** 0.23 0.16 0.92 S(S)
Hong 2.64(1.36) − 0.04(0.91) 0.02(0.71) -2.06(0.69) − 0.63(2.64)*** 6.57(1.65)* 1.51 − 0.27(2.53)*** 0.54 0.79 0.81 S(S)
Kong
Eurasian Economic Review (2023) 13:127–144

India -1.06(1.41) − 0.05(0.6) − 0.01(0.47) 21.07(2.65)*** -2.54(0.89) 1.12(4.63)*** 1.16 − 0.28(2.21)** 0.93 0.98 0.77 S(S)
Indonesia -4.32(2.65)*** − 0.08(1.26) − 0.02(0.4) 20.77(1.44) 1.56(4.38)*** 1.56(4.38)*** 3.11 − 0.32(3.62)*** 0.95 0.002 0.78 S(US)
Italy 0.2(1.75)* − 0.02(0.45) − 0.01(0.49) 3.08(0.7) − 0.83(0.16) 0.43(1.4) 0.78 − 0.2(1.8)* 0.11 0.01 0.57 S(US)
Japan 3.35(0.52) − 0.03(1.23) − 0.03(2.12)**126.64(1.6) − 0.9(0.7) − 0.89(1.15) 5.83 − 0.15(4.98)*** 2.54 4.85 0.86 S(US)
Korea 8.75(3.12)*** − 0.08(1.81)* 0.04(3.41)*** 20.15(3.06)*** − 0.79(5.39)*** − 0.39(1.6) 5.09 − 0.47(4.65)*** 0.16 1.64 0.67 S(S)
Mexico − 0.05(0.6) − 0.03(2.46)** − 0.01(0.61) -52.65(0.45) 105.46(0.41) -1.43(0.42) 1.91 0.02(2.83)*** 1.85 0.08 0.85 S(S)
Russia 0.12(0.03) − 0.13(1.06) 0.17(3.26)*** -6.59(1.41) 0.06(0.15) − 0.13(0.49) 7.08 − 0.58(5.43)*** 1.39 1.16 0.44 S(S)
Singapore − 0.33(3.06)*** − 0.24(4.08)*** 0.01(0.38) -2.54(0.98) -12.28(5.33)*** 1.18(8.08)*** 9.5 − 0.54(6.32)*** 0.64 0.000003 0.74 S(S)
South − 0.46(1.48) − 0.09(1.37) 0.07(1.1) 92.46(1.18) 399.16(1.04) 1.53(0.82) 4.25 − 0.13(4.28)*** 0.49 0.04 0.66 S(S)
Africa
Switzerland 0.22(2.62)*** − 0.01(0.18) − 0.06(1.37) 18.37(1.56) 47.0(2.83)*** 2.12(2.86)*** 7.08 0.29(5.45)*** 1.7 0.09 0.86 S(S)
Taiwan 2.29(1.69)* − 0.08(1.65)* 0.02(0.77) 2.78(0.81) − 0.28(3.73)*** 0.57(1.52) 8.64 − 0.82(6.02)*** 0.24 0.87 0.43 S(S)
Thailand -4.32(2.29)** 0.04(0.77) 0.01(0.99) -5.44(2.23)** 0.18(1.57) 0.93(5.09)*** 7.93 − 0.87(5.76)*** 0.29 1.89 0.51 US(S)

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 Table 2 (continued)
136

Panel A: Long-Run Estimates Panel B: Diagnostic Statistics

Turkey 4.31(3.3)*** − 0.05(0.54) − 0.3(1.57) 29.65(1.44) -1.66(3.36)*** 1.82(3.7)*** 3.28 − 0.22(3.72)*** 1.07 0.06 0.87 S(S)

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Vietnam -11.4(1.02) − 0.07(0.31) − 0.03(0.58) 29.38(0.81) 0.72(1.61) 0.84(1.65) 1.22 − 0.53(2.33)** 6.02 2.31 0.47 S(S)
Notes: *** ,**, * show the significance at the 1%, 5% and 10% respectively.
LM is Lagrange Multiplier test of residual serial correlation. It is distributed as χ2 with one degree of freedom (first order). Its critical value at 1%, 5% and 10% level is
6.63, 3.84 and 2.71 .
RESET is Ramsey’s test for misspecification. It is distributed as χ2 with one degree of freedom and its critical value at 1%, 5% and 10% level is 6.63, 3.84 and 2.71.
CU and CUQ are CUSUM and CUSUMQ respectively to test stability of all coefficients.
The F test due to Narayan (2005) is denoted by Narayan. At the 1%, 5% and 10% significance level when there are three exogenous variables (k = 3) and n = 75, its critical
value is 6.08, 4.55 and 3.898. This comes from Narayan (2005, Table CI-Case III, page 1988)

Table 3 ARDL estimates considering current account balance currency manipulation criterion
Panel A: Long-Run Estimates Panel B: Diagnostic Statistics
C. FC CA YUS Yi REXi F ECM LM RESET Adj. CS
R2 (CS2)
Argentina 10.95(2.26) 0.17(2.41)*** 0.02(0.35) 8.21(1.2) -2.38(8.9)*** 0.58(3.38)*** 4.94 − 0.4(4.57)*** 3.41 0.97 0.91 S(S)
Canada − 0.0002(0.02) 0.003(0.19) 0.03(1.42) 4.21(0.79) − 0.87(0.06) 0.51(2.11)** 3.22 0.14(3.69)*** 1.64 0.98 0.95 US(S)
China 0.59(0.43) − 0.06(0.68) 0.1(1.95)* -866.32(0.14) 648.48(0.14) 15.65(0.18) 4.1 0.02(4.16)*** 0.75 1.11 0.93 S(S)
Germany − 0.002(0.04) − 0.04(1.91)* 0.11(3.42)*** 5.22(0.38) -12.35(1.5) − 0.1(0.22) 3.35 − 0.13(3.79)*** 0.23 0.16 0.92 S(S)
Hong 2.32(1.09) − 0.03(0.74) − 0.01(0.22) -1.9(0.7) − 0.59(2.45)*** 7.67(1.28) 1.45 − 0.25(2.48)*** 0.58(0.56) 0.52 0.81 S(S)
Kong
India − 0.95(1.25) 0.03(0.33) 0.09(1.02) 23.55(2.28)*** -1.08(0.45) 0.91(3.13)*** 2.06 − 0.31(2.95)*** 0.19 0.05 0.76 S(S)
Indonesia -4.8(2.98)*** − 0.07(1.21) − 0.06(1.16) 20.19(1.48) 9.74(1.36) 1.86(4.95)*** 3.26 − 0.29(3.71)*** 0.65 0.01 0.79 S(US)
Italy 0.14(1.28) − 0.04(1.14) − 0.04(1.7)* 6.74(0.76) -4.89(0.51) 0.86(1.0) 0.56 − 0.12(1.53) 1.21 0.27 0.56 S(S)
Japan -8.66(1.07) − 0.05(1.83)* − 0.05(2.67)*** -608.3(0.19) -17.8(0.22) 6.55(0.2) 5.57 0.03(4.89)*** 1.15 5.36 0.87 S(S)
Korea 6.82(3.25)*** − 0.08(2.06)** 0.07(2.71)*** -2.45(1.69)* − 0.84(4.82)*** − 0.45(1.45) 4.93 − 0.34(4.53)*** 3.21 0.05 0.63 S(S)
Eurasian Economic Review (2023) 13:127–144
 Table 3 ARDL estimates considering current account balance currency manipulation criterion
Panel A: Long-Run Estimates Panel B: Diagnostic Statistics
Russia 3.64(0.82) − 0.06(0.46) 0.12(1.1) -4.68(0.55) − 0.41(0.69) − 0.28(0.76) 4.24 − 0.41(4.2)*** 1.17 0.14 0.36 S(S)
Switzer- − 0.02(0.07) 0.02(0.21) 0.14(0.59) 17.45(1.24) 61.01(2.88)*** 1.81(2.06)* 7.08 0.28(5.45)*** 1.77 0.0001 0.86 S(S)
land
Thailand -5.36(2.77)*** 0.04(0.86) − 0.01(0.33) -8.18(2.65)*** 0.29(2.08)** 1.15(5.39)*** 8.44 − 0.73(5.95)*** 0.59 0.05 0.52 S(S)
Vietnam -9.55(0.84) 0.15(0.83) 0.07(0.87) 45.89(1.5) 0.18(0.85) 1.02(2.66)*** 1.69 0.78(2.74)*** 7.36 1.77 0.45 S(S)
Notes: *** ,**, * show the significance at the 1%, 5% and 10% respectively.
LM is Lagrange Multiplier test of residual serial correlation. It is distributed as χ2 with one degree of freedom (first order). Its critical value at 1%, 5% and 10% level is
6.63, 3.84 and 2.71 .
RESET is Ramsey’s test for misspecification. It is distributed as χ2 with one degree of freedom and its critical value at 1%, 5% and 10% level is 6.63, 3.84 and 2.71.
CU and CUQ are CUSUM and CUSUMQ respectively to test stability of all coefficients.
Eurasian Economic Review (2023) 13:127–144

The F test due to Narayan (2005) is denoted by Narayan. At the 1%, 5% and 10% significance level when there are three exogenous variables (k = 3) and n = 75, its critical
value is 6.08, 4.55 and 3.898. This comes from Narayan (2005, Table CI-Case III, page 1988)

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 138

13
Table 4 ARDL estimates considering bilateral trade balance currency manipulation criterion
Panel A: Long-Run Estimates Panel B: Diagnostic Statistics
C. FC BB YUS Yi REXi F ECM LM RESET Adj. CS
R2 (CS2)
Canada − 0.04(3.05)*** 0.01(0.95) 0.04(3.52)*** 13.29(4.18)*** 23.05(4.86)*** 0.55(4.36)*** 10.52 − 0.26(6.69)*** 1.37 1.1 0.94 S(S)
India -1.5(1.76)* − 0.06(0.73) 0.02(0.56) 17.83(2.66)*** -1.81(0.74) 1.27(5.65)*** 1.79 − 0.34(2.74)*** 0.88 1.02 0.77 S(S)
Korea 8.41(3.22)*** − 0.08(1.77)* 0.09(3.23)*** 19.06(4.04)*** − 0.66(9.36)*** − 0.02(0.06) 6.89 − 0.63(5.39)*** 0.19 0.01 0.68 S(S)
Russia 3.23(0.71) − 0.02(0.13) 0.03(0.3) -3.04(0.33) − 0.4(0.63) − 0.14(0.29) 3.87 − 0.38(4.02)*** 0.95 0.03 0.35 S(S)
Switzerland 0.12(3.38)*** − 0.02(0.26) 0.11(1.13) 21.36(1.03) 75.87(2.06)** 2.44(1.86)* 5.17 0.17(4.67)*** 1.35 0.33 0.86 S(S)
Taiwan 3.93(2.76)*** − 0.09(1.95)* 0.12(1.97)** 2.28(0.87) − 0.34(6.26)*** 0.44(1.47) 9.79 − 0.94(6.41)*** 0.16 0.76 0.46 US(S)
Thailand -5.02(2.57)*** 0.04(0.83) 0.01(0.2) -7.8(2.91)*** 0.26(1.86)* 1.11(5.49)*** 8.34 − 0.75(5.92)*** 0.68 0.11 0.52 US(S)
Vietnam -27.49(2.43)** − 0.39(1.95)* 0.33(2.04)** 41.21(2.89)*** 0.38(3.27)*** 1.98(8.53)*** 2.27 -1.06(3.22)*** 0.26 2.19 0.69 S(S)
Notes: *** ,**, * show the significance at the 1%, 5% and 10% respectively.
LM is Lagrange Multiplier test of residual serial correlation. It is distributed as χ2 with one degree of freedom (first order). Its critical value at 1%, 5% and 10% level is
6.63, 3.84 and 2.71 .
RESET is Ramsey’s test for misspecification. It is distributed as χ2 with one degree of freedom and its critical value at 1%, 5% and 10% level is 6.63, 3.84 and 2.71.
CU and CUQ are CUSUM and CUSUMQ respectively to test stability of all coefficients.
The F test due to Narayan (2005) is denoted by Narayan. At the 1%, 5% and 10% significance level when there are three exogenous variables (k = 3) and n = 75, its critical
value is 6.08, 4.55 and 3.898. This comes from Narayan (2005, Table CI-Case III, page 1988)
Eurasian Economic Review (2023) 13:127–144
Eurasian Economic Review (2023) 13:127–144 139

Table 3 reports the effects of the currency manipulation criterion that states a coun-
try can be considered a currency manipulator if its current account surplus is over
2% of GDP. Results show that this criterion-based effect is significantly observable
in China, Germany, Italy, Japan, and Korea. The effect is positively significant in the
case of China, Germany, and Korea. It is negatively significant in the case of Italy
and Japan. It should be noted the effect of the currency manipulation index was not
observable in the case of China and Italy. This way disaggregating the index provides
more insights. These insights are meaningful as diagnostics reported in Panel-B of
Table 3 support the appropriateness of models. Cointegration is established in all the
significant cases based on F-test or ECM except in Italy. Models are auto-correlation
free, are correctly specified and coefficients are stable in all significant cases.
The next criterion regarding currency manipulation states that the trading partner
can be considered a currency manipulator if it has a trade balance surplus of over
20 billion US dollars with the US. The effect based on this criterion is reported in
Table 4. Notably, effects are positively significant in all the significant cases (i.e.
Canada, Korea, Taiwan, Vietnam). Diagnostics that are reported in Panel B of Table 4
support the appropriateness of the models in these cases.
Finally, we look into the criterion that states that a country is considered a currency
manipulator if it buys over 2% of its GDP US dollars in foreign exchange markets in
six out of the last twelve months. The results are reported in Table 5 which shows that
the effects are positively significant in the case of Russia and Thailand and negatively
significant in the case of Switzerland and Vietnam. This implies that intervention in
the currency market promotes exports to the US in the prior cases while discourag-
ing them in the latter cases. The diagnostics are supportive of the meaningfulness of
estimates in most of these cases.
Overall the findings show that currency manipulation by the trading partner hurt
the US trade balance. However, there is country-level heterogeneity in the results.

4.3 Robustness check: a panel analysis

We repeat the analysis in subsections 3.1 and 3.2 using the panel approach as a
robustness check. We use Pedroni’s (1999) cointegration approach to examine the
long-run relationship presence among the Eq. (1) variables. Pedroni (1999) provides
seven tests to examine cointegration5. The results reported in Table 6 show that all
seven tests reject the null hypothesis of no integration for main models as well as
disaggregated models6. These results establish the presence of a long-run relationship
among the variables.
Once the cointegration is established, we use the group-mean panel fully modi-
fied ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS)
suggested by Pedroni (2001a, 2001b) to estimate the long-run parameters. These
approaches are useful to deal with endogeneity, heteroscedasticity, and serial correla-
tion issues (Yahyaoui & Bouchoucha, 2021). The results are reported in Table 7 and
show that the currency manipulations index coefficient is significantly positive based

5
For details on these tests, Please read Pedroni (1999).
6
The panel unit root results are available from the authors on request.

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 Table 5 ARDL estimates considering FX intervention currency manipulation criterion
140

Panel A: Long-Run Estimates Panel B: Diagnostic Statistics

Partner i C. FC FI YUS Yi REXi F ECM LM RESET Adj. CS

13
R2 (CS2)
Argentina 11.63(2.39)*** 0.18(2.44)*** 0.04(0.96) 4.62(0.72) -2.38(9.06)*** 0.52(3.56)*** 6.64 − 0.43(5.3)*** 3.7 0.64 0.91 S(S)
Australia − 0.44(2.96)*** 0.01(0.26) 0.09(0.84) 8.15(1.68)* -11.91(2.81)*** 0.61(4.71)*** 5.44 − 0.46(4.79)*** 0.27 0.004 0.79 US(S)
Brazil 12.78(4.08)*** − 0.05(1.17) − 0.004(0.12) 21.52(3.54)*** -2.31(7.18)*** 0.05(0.29) 5.98 − 0.44(5.01)*** 0.14 0.06 0.92 S(S)
China − 0.105(0.6) − 0.02(0.23) − 0.02(0.42) 99.95(0.86) -61.47(0.79) 3.89(2.75)*** 2.04 − 0.13(2.93)*** 1.16 4.48 0.93 S(S)
Hong Kong 2.11(1.07) − 0.05(1.09) 0.03(1.04) -3.21(0.9) − 0.64(1.98)** 8.92(1.39) 1.25 − 0.21(2.29)** 0.44 0.54 0.82 S(US)
India -1.18(1.75)* − 0.001(0.01) − 0.06(1.62) 28.43(2.63)*** -4.1(1.3) 1.51(3.61)*** 1.11 − 0.22(2.15)** 0.82 0.52 0.78 US(S)
Indonesia -5.03(2.84)*** − 0.09(1.41) 0.05(0.76) 18.87(1.41) 9.00(1.43) 1.82(5.18)*** 3.38 − 0.31(3.77)*** 0.64 0.01 0.79 S(US)
Japan 5.12(1.26) − 0.03(1.14) 0.02(0.94) -2.59(0.36) -2.82(1.27) 0.26(0.44) 0.75 − 0.09(1.78) 2.27 2.77 0.82 S(US)
Korea 2.51(1.6) − 0.09(2.12)** 0.03(1.49) -3.46(1.68)* − 0.43(2.42)*** − 0.15(0.38) 2.65 − 0.25(3.32)*** 1.49 0.01 0.61 S(S)
Mexico − 0.06(0.7) − 0.03(2.46)*** − 0.01(0.61) -52.65(0.44) 105.5(0.41) -1.43(0.43) 1.91 0.02(2.83)*** 1.85 0.08 0.85 S(S)
Russia 0.32(0.07) − 0.17(1.28) 0.22(2.99)*** -9.66(0.7) 0.09(0.2) − 0.29(1.03) 6.62 − 0.56(5.26)*** 3.68 0.72 0.42 S(S)
Singapore − 0.31(3.11)*** − 0.24(4.07)*** 0.01(0.38) -2.54(0.98) -12.28(5.33)*** 1.18(8.08)*** 9.5 − 0.54(6.32)*** 0.64 0.000003 0.74 S(S)
South Africa − 0.46(1.48) − 0.09(1.36) 0.07(1.1) 92.46(1.19) 399.16(1.05) 1.53(0.83) 4.25 − 0.13(4.27)*** 0.48 0.04 0.66 S(S)
Switzerland 0.46(5.63)*** 0.13(1.44) − 0.19(3.72)*** 39.58(5.4)*** 74.52(5.04)*** 2.94(7.3)*** 8.73 0.52(6.13)*** 0.89 0.003 0.89 S(S)
Taiwan 2.61(1.74)* − 0.09(1.74)* − 0.0002(0.01) 2.05(0.63) − 0.31(4.06)*** 0.6(1.54) 8.36 − 0.81(5.92)*** 0.32 0.58 0.42 S(S)
Thailand -5.54(2.92)*** 0.05(1.03) 0.05(1.97)** -5.42(2.04)** 0.23(3.17)*** 0.93(8.21)*** 7.1 − 0.98(5.49)*** 1.91 0.07 0.53 US(S)
Turkey 4.31(3.3)*** − 0.05(0.55) − 0.3(1.57) 29.65(1.44) -1.66(3.36)*** 1.82(3.7)*** 3.28 − 0.22(3.73)*** 1.06 0.06 0.87 S(S)
Vietnam -19.51(1.81)* − 0.18(0.82) − 0.12(1.72)* 43.85(1.35) 1.12(2.53) 1.55(2.35)** 2.06 − 0.53(3.03)*** 4.86 4.02 0.52 S(US)
Notes: *** ,**, * show the significance at the 1%, 5% and 10% respectively.
LM is Lagrange Multiplier test of residual serial correlation. It is distributed as χ2 with one degree of freedom (first order). Its critical value at 1%, 5% and 10% level is 6.63,
3.84 and 2.71 .
RESET is Ramsey’s test for misspecification. It is distributed as χ2 with one degree of freedom and its critical value at 1%, 5% and 10% level is 6.63, 3.84 and 2.71.
CU and CUQ are CUSUM and CUSUMQ respectively to test stability of all coefficients.
The F test due to Narayan (2005) is denoted by Narayan. At the 1%, 5% and 10% significance level when there are three exogenous variables (k = 3) and n = 75, its critical
value is 6.08, 4.55 and 3.898. This comes from Narayan (2005, Table CI-Case III, page 1988)
Eurasian Economic Review (2023) 13:127–144
Eurasian Economic Review (2023) 13:127–144 141

Table 6 Panel cointegration results

With CM (1) With CA (2) With BB (3) With FI (4)
Test Statistic
Panel 7.41(0.00)*** 4.95(0.00)*** 4.64(0.00)*** 5.57(0.00)***
v-Statistic
Panel -13.18(0.00)*** -11.17(0.00)*** -11.23(0.00)*** -12.12(0.00)***
rho-Statistic
Panel -15.85(0.00)*** -12.99(14.41)*** -13.04(0.00)*** -14.56(0.00)***
PP-Statistic
Panel -13.23(0.00)*** -5.04(0.00)*** -7.61(0.00)*** -12.04(0.00)***
ADF-Statistic
Group -12.93(0.00)*** -9.26(0.00)*** -10.06(0.00)*** -12.04(0.00)***
rho-Statistic
Group -17.2(0.00)*** -12.77(0.00)*** -13.64(0.00)*** -16.82(0.00)***
PP-Statistic
Group -10.84(0.00)*** -4.44(0.00)*** -5.39(0.00)*** -9.42(0.00)***
ADF-Statistic
Model (1) includes the currency manipulation index while models (2–4) include currency manipulation
index dimensions. Panel v-Statistic is right tailed test while all the rest are left tailed tests. P-values are
in parenthesis. *** shows the level of significance at 1%. Abbreviations: CM(currency manipulation),
CA(current account balance, BB(balance of trade), FI( Foreign exchange intervention)

on both FMOLS and DOLS estimates which again implies that currency manipula-
tions by the US trading partners decrease the US trade balance. The disaggregated
results are reported in panels 2 to 4 of Table 7 report that each of the three criteria of
currency manipulation has significant positive effects based on FMOLS. However,
the positive effect of only current account balance and balance of trade is notable
based on the DOLS. From disaggregated analysis, the size of coefficients highlights
the greater role of current account balance and trade balance criteria of currency
manipulation than that of currency interventions. Overall, the panel analysis supports
the earlier time series analysis results.

5 Conclusion

This study provides evidence on the impact of currency manipulations, the inten-
tional intervention in the foreign exchange market by a country’s government or
central bank, on the US bilateral trade balance. By analyzing data from 2000Q4 to
2020Q2 of twenty-one major trading partners of the US, the study finds that overall,
currency manipulations have a detrimental effect on the US trade balance with some
country-level heterogeneity. These findings hold true in both the main analysis and
the analysis of each currency manipulation criterion.
This study provides evidence that currency manipulations have a negative effect
on the US bilateral trade balance which implies that policymakers should consider
this when making decisions related to international trade and implement measures to
discourage currency manipulations in order to promote fairness in international trade.
Open trade policies that boost productivity are essential for economic development
(Atkinson, 2009). Therefore, policymakers should strive to promote fairness and pro-
ductivity in the global economy.

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13
Table 7 Panel cointegration regression estimates
Panel A: FMOLS Panel B: DOLS
(1) (2) (3) (4) (1) (2) (3) (4)
FC 0.08(1.88)* 0.1(1.7)* 0.14(2.06)** 0.09(1.7)* − 0.12(1.46) − 0.15(1.52) − 0.16(1.35) − 0.16(1.65)***
CM 0.14(7.65)*** - - 0.1(2.96)*** - -
CA - 0.23(5.47)*** - - - 0.24(3.5)*** -
BB - 0.22(4.21)*** - - 0.17(2.55)*** -
FI - - 0.11(3.23)*** - − 0.03(0.64)
Y − 0.3(0.3) 0.01(0.01) -1.13(0.64) − 0.28(0.23) -3.18(179)* -5.4(2.4)*** -4.03(1.51) -2.82(1.39)
Y* − 0.4(4.04)*** − 0.31(2.32)** − 0.4(2.93)*** − 0.23(2.26)** − 0.3(2.18)** − 0.4(2.44)*** − 0.22(1.24) − 0.12(0.84)
REX 0.45(6.14)*** 0.37(3.46)*** 0.5(3.23)*** 0.4(4.61)*** 0.92(8.88)*** 0.46(3.45)*** 0.61(3.25)*** 1.04(9.37)***
Model (1) includes the currency manipulation index while models (2–4) include currency manipulation index dimensions. t-statistics values are in parentheses in their
absolute form. ***,**,* show level of significance at 1%, 5%, and 10% respectively. Panel A reports the estimates of modified ordinary least squares (FMOLS) and Panel
B reports the estimates of dynamic ordinary least squares (DOLS)
Abbreviations: FC(Financial crisis), CM(currency manipulation), CA(current account balance, BB(balance of trade), FI(Foreign exchange intervention), Y(US income),
Y*(trading partner income), REX(real exchange rate)
Eurasian Economic Review (2023) 13:127–144
Eurasian Economic Review (2023) 13:127–144 143

For general readers, this study provides an understanding of the impact of currency
manipulation on the US trade balance and how it can affect the competitiveness of
the country in the global market. It highlights the importance of regulating currency
manipulations to support domestic industries and promote fair international trade.
However, trade imbalances between countries such as the persistent trade sur-
plus of China with the US may be precisely explained by other importnat factors
like comparative advantage, investment opportunities, and international specializa-
tion of production activities along with currency manipulations. Thus policymakers
should consider all the important factors when addressing trade imbalances and not
just focus on currency manipulation. There is much need for further research to fully
understand the dynamics of trade balances in a multilateral world that may change
over time with different economic conditions.

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