Tóm tắt luận án tieng anh: The role of vehicle currency in affecting trade balance: Empirical evidence from the trade of China and the association of South East Asian nations with the European Union .

The role of vehicle currency in affecting trade balance: Empirical evidence from the trade of China and the association of South East Asian nations with the European Union .The role of vehicle currency in affecting trade balance: Empirical evidence from the trade of China and the association of South East Asian nations with the European Union .The role of vehicle currency in affecting trade balance: Empirical evidence from the trade of China and the association of South East Asian nations with the European Union .The role of vehicle currency in affecting trade balance: Empirical evidence from the trade of China and the association of South East Asian nations with the European Union .The role of vehicle currency in affecting trade balance: Empirical evidence from the trade of China and the association of South East Asian nations with the European Union .The role of vehicle currency in affecting trade balance: Empirical evidence from the trade of China and the association of South East Asian nations with the European Union .The role of vehicle currency in affecting trade balance: Empirical evidence from the trade of China and the association of South East Asian nations with the European Union .The role of vehicle currency in affecting trade balance: Empirical evidence from the trade of China and the association of South East Asian nations with the European Union .The role of vehicle currency in affecting trade balance: Empirical evidence from the trade of China and the association of South East Asian nations with the European Union .2 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY HO HOANG GIA BAO THE ROLE OF VEHICLE CURRENCY IN AFFECTING TRADE BALANCE EMPIRICAL EVIDENCE FROM THE TRADE OF CHINA AND TH.

-HO -HOANG GIA BAO

THE ROLE OF VEHICLE CURRENCY IN AFFECTING TRADE BALANCE: EMPIRICAL EVIDENCE FROM THE TRADE OF CHINA AND THE ASSOCIATION OF SOUTH EAST ASIAN

NATIONS WITH THE EUROPEAN UNION

MAJOR: FINANCEMAJOR ID: 9340201

DOCTORAL DISSERTATION SUMMARY

HO CHI MINH CITY – 2023

Academic supervisors: - Assoc Prof Dr Tran Thi Hai Ly

- Dr Dinh Thi Thu Hong

Reviewer 1: ………

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Reviewer 2: ………

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Reviewer 3: ………

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The dissertation will be defensed before the university-level dissertation evaluation council at: ………

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At hour day month year The dissertation can be accessed at the library: ………

CHAPTER 1: INTRODUTION 1.1 Research background and motivations

Manifold studies have scrutinized the links between exchange ratesand trade balances in various countries However, they have the samelimitation when most of them ignore the roles of vehicle currencies, whichfails to reflect the common practice in global trade invoicing

A vehicle currency is defined as the currency of a third country used

in the trade between the other two countries (Goldberg & Tille, 2008) It is acommon practice in the global trade to invoice the goods by vehiclecurrencies Noticeably, the USD has an overwhelming role and thus is usedfor invoicing the goods in the trade of many countries with their partnerseven when the US does not participate in such trade (Boz et al., 2022).Specifically, the share of the US in the global trade was less than 10%, butthe USD was employed in nearly 40% of the total global trade value Thisimplies that roughly 30% of the world’s trade, without the participation ofthe US, was settled by the USD And even the EU, the home of the world’ssecond most popular currency euro (EUR), substantially employed the USD

in its trade with non-US partners Thus, the dominance of the USD in theglobal trade is indisputable

Nevertheless, most existing studies on the impacts of exchange rates

on trade balances ignored the role of vehicle currencies, especially the USD.The inadequate investigation of vehicle currencies in the literature onexchange rate-trade balance relationship reveals some notable research gapsthat need to be filled

The choice of the countries in this dissertation is motivated by thefollowing reasons:

- Asian emerging market economies have dominated the global trade

of all emerging market economies which have grown rapidly andincreasingly contributed to the world’s total output and consumption.Among those Asian countries, China and nearly all the ASEAN countriesare the most noticeable representatives In addition, China and most of theASEAN countries, similar to the other Asian emerging market economies,substantially employ the USD as a vehicle currency in their trade

- Although the EU is the home of the EUR – the world’s secondmost utilized currency, it strongly relies on the USD as a vehicle currency intrading with non-EU partners, especially in its importation Moreover, thelargest and the third largest origins of the EU’s importation from non-EUcountries are China and ASEAN Therefore, it can be inferred that the USD

is strongly utilized as a vehicle currency in China-EU and ASEAN-EUtrade

- The EU is the biggest trading partner of China and vice versa.Thus, the China-EU trade is important enough to be researched And moreinterestingly, the China-EU trade relies much on the USD as a vehiclecurrency

- ASEAN consists of 10 countries, and most of them have grownvery fast and gained more and more importance in the global trade Themarket of ASEAN is very lucrative with more than 640 million customers,which is the eighth biggest economy in the world Thus, it is not surprisingwhen the priority of the EU is to promote their exports to ASEAN throughbilateral and region-to-region free trade agreements Therefore, theASEAN-EU trade can provide valuable empirical evidences for the roles of

USD as a vehicle currency in the trade between these two regions atdifferent levels of analyses.

- By analyzing the China-EU and ASEAN-EU trade, the USDsatisfies the definition of a vehicle currency Specifically, a vehicle currency

is defined as a third-country’s currency used for invoicing the merchandisetraded between the other two countries (Goldberg & Tille, 2008) Therefore,

as the US is not involved in China-EU and ASEAN-EU trade, the USD isconsidered a vehicle currency

- The choice of China-EU trade in this dissertation enables a new anddistinguishable analytical approach on the exchange rate USD/CNY.Particularly, although USD/CNY has been in the spotlight of manifoldresearch, it is investigated in connection with the China-US relationship.Nevertheless, virtually no paper examines the impacts of USD/CNY onChina’s trade with non-US partners Thus, this dissertation provides a newperspective on the role of USD/CNY in China-EU trade, and the findingsindicate that the exchange rate USD/CNY have significant impacts onChina’s trade balance with the EU at different levels of analysis

1.2 Research objectives

- Research Objective 1: Scrutinize the effects of the use and nonuse

of the vehicle currency USD on China’s trade balance with the EU atdifferent levels of analyses

- Research Objective 2: Scrutinize the effects of the use and nonuse

of the vehicle currency USD on ASEAN’s trade balance with the EU atdifferent levels of analyses

1.3 Research questions

- Research Question 1: At each level of analysis, do the use andnonuse of the vehicle currency USD have distinguishable effects on China’strade balance with the EU?

- Research Question 2: At each level of analysis, do the use andnonuse of the vehicle currency USD have distinguishable effects onASEAN’s trade balance with the EU?

1.4 Research scope

The dissertation explains why the standard two-country model can

be employed for analyzing the role of a vehicle currency, especially theUSD Also, the dissertation explores the impacts of the use and nonuse ofthe vehicle currency USD on China’s and ASEAN’s trade balances with the

EU at different levels of analyses The time span is from 2000Q1 to2018Q1 For the industry-level analyses, the time span is from 2002Q1 to2018Q1 due to the unavailability of data The estimation method isNonlinear Autoregressive Distributed Lags (NARDL) The data arecollected from various sources including Asian Development Bank (ADB),Direction of Trade Statistics (DOTS), Eurostat, Federal Reserve Bank of St.Louis (FRED), General Statistics Office of Vietnam (GSO), andInternational Financial Statistics (IFS)

1.5 The contributions of the dissertation

Regarding the theoretical contributions, this dissertation is the firststudy to explain why the standard two-country model, which serves as thetheoretical framework for most of the research about exchange rates’impacts on trade balances, can be used for scrutinizing the role of a vehiclecurrency The explanation and the method suggested by this dissertation canovercome the shortage of data about the percentage of a vehicle currency

used in the trade of two countries Furthermore, from the explanation andthe method suggested by this dissertation, researchers can apply thestandard two-country model to investigate the role of any vehicle currency

in the trade of any two countries in the world Thus, this dissertation makes

a theoretical contribution to the literature by strengthening the standard country model to make it applicable in the presence of a vehicle currency.The dissertation also has some empirical contributions to theliterature Specifically,

two First, the dissertation is the first research to provide the empiricalevidences about the impacts of the vehicle currency USD’s exchange rate

on China’s trade balance with the EU at different levels of analyses

- Second, it is also the first research to provide the comparisonsbetween the impacts of the use and nonuse of the vehicle currency USD onChina’s trade balance with the EU at different levels of analyses

- Third, the dissertation is the first research to provide the empiricalevidences about the impacts of the vehicle currency USD’s exchange rate

on ASEAN’s trade balance with the EU at different levels of analyses

- Fourth, it is also the first one to compare the impacts of the use andnonuse of the vehicle currency USD on ASEAN’s trade balance with the

EU at different levels of analyses

- Fifth, the construction of the proxy for the exchange rate betweentwo regions has been inadequately addressed by the existing studies Thisdissertation is the first research to propose the construction of the proxy forthe exchange rate between two regions

- Sixth, the dissertation suggests a new factor leading to thedeficiency of significant findings Namely, besides the two factors causing

the shortage of significant findings already found by the existing literature(i.e., the aggregation bias and symmetric assumption about exchange rate-trade balance linkage), the dissertation proposes that the neglection of thevehicle currency USD in the scrutiny of the trade between two non-USpartners can be a new culprit.

- Seventh, the research design of this dissertation can effectivelyassess the role of USD as a vehicle currency which has been neglected byprior studies

CHAPTER 2: LITERATURE REVIEW 2.1 The impacts of exchange rates on trade balances

The Marshall-Lerner condition (Marshall, 1923; Lerner, 1944), the curve effect (Magee, 1973), and the standard two-country model (Rose &Yellen, 1989) are the main theoretical frameworks for the studies on theimpacts of exchange rates on trade balances They assume that thecurrencies used for invoicing the exported and imported goods either belong

J-to the home country or the foreign country, and thus the role of a vehiclecurrency is missing

The J-curve effect has been the most popular topic regarding theimpacts of exchange rates on trade balances (Ali et al., 2014) Since thework of Magee (1973), numerous studies have focused on the J-curve effect

to concurrently investigate the short-run and long-run impacts of exchangerates on trade balances instead of solely scrutinizing the Marshall-Lernercondition which only describes the long-run relationship (Bahmani-Oskooee & Mitra, 2010) The development of the literature on the J-curveeffect has the following main features:

- First, almost every country and territory in the world have J-curvestudies devoted to them Moreover, the impacts of exchange rates on tradebalances vary from country to country In addition, for a given country orterritory, the support for the J-curve effect is also subject to different papersusing distinctive data and methods.

- Second, the application of aggregated data can result in theaggregation bias and consequently causes insignificant findings about the J-curve effect

- Third, to reduce the aggregation bias, the obvious trend in thedevelopment of J-curve literature is the transition from the aggregate-levelanalysis to the bilateral-level and industry-level ones

- Fourth, besides the aggregation bias, the symmetric assumptionabout the impacts of exchange rates on trade balances is another culprit forthe lack of significant findings Particularly, Bahmani-Oskooee andFariditavana (2015, 2016) criticized the prior studies that relied on thesymmetric assumption (i.e., a 1% depreciation and a 1% appreciation of acountry’s currency have the same magnitude of effect on its trade balance)which contributed to the inadequacy of significant results Since thepioneering articles of Bahmani-Oskooee and Fariditavana (2015, 2016),there is a clear transition of the recent studies from the symmetricassumption which mostly used the ARDL method to the asymmetric onewhich normally employed the NARDL method And virtually all therecently published articles indicated that the NARDL method is better thanthe ARDL counterpart in detecting more significant results of exchangerates’ impacts on trade balances

- Fifth, almost all the studies have ignored the roles of vehiclecurrencies Only a few papers have empirically included vehicle currencies

in their analyses (Šimáková, 2013; Nhung et al., 2018), but they did notgive any theoretical framework or explanation for their work Thus, theylacked the theoretical basis and explanation why the vehicle currencies can

be incorporated into the standard two-country model

In addition, the literature review of this dissertation also indicatesthat no paper has examined the exchange rate-trade balance nexus inChina’s total trade with the whole EU, China’s bilateral trade with allmembers of the EU, and China’s trade with the whole EU at industry level

In addition, no paper has covered the role of the vehicle currency USD inthe aforesaid trade Also, no paper has examined the exchange rate-tradebalance nexus in ASEAN’s total trade with the whole EU, the trade of eachASEAN member of the whole EU, and the trade of the entire ASEAN withthe whole EU at industry level Besides, it is noticeable that no research hascovered the role of the vehicle currency USD in ASEAN’s trade with the

EU at different levels of analyses

2.2 The dominance currency paradigm

The dominance of USD has been one of the most noticeable patterns

of the global trade for many years The leading role of USD is soremarkable that its importance cannot be disregarded in the trade betweenany two non-US countries (Boz et al., 2022) Realizing that both the

“producer currency pricing” and “local currency pricing” paradigms failed

to reflect the world with an overwhelmingly prominent currency (i.e., theUSD), Gopinath et al (2020) developed a new one called the “dominantcurrency paradigm” to fill the gap in the literature Published in the

American Economic Review journal, Gopinath et al (2020) provided anextensive theoretical framework and compelling empirical evidences for therole of the dominant currency USD in affecting the trade of a country withthe rest of the world Namely, they documented that the USD’s exchangerates had much stronger impacts on the pass-through and trade values of thesampled countries than the bilateral exchange rates Thus, the role of USD

is vitally important in the trade between any two countries regardless of theinvolvement of the US

2.3 The choice of invoicing currencies

There is a different line of research that does not scrutinize theimpacts of exchange rates on trade balances; instead, those studies focus onwhat determine the choice of invoicing currencies Many factors have beenidentified as the determinants of the choice of invoicing currencies in theglobal trade such as transaction cost (Krugman, 1980), the volatility ofmacroeconomic conditions (Devereux et al., 2004), the development offinancial market (Liu & Lu, 2019), exchange rate risk and hedgingpossibility (Goldberg & Tille, 2016), country size (Goldberg & Tille, 2008),market share (Bacchetta & van Wincoop, 2005), product differentiation (Ito

et al., 2012), bargaining power (Wang & Zhao, 2014), firm size (Amiti etal., 2022), etc From the review of the currency-choice literature, the crucialroles of vehicle currencies, especially the USD, in the global trade areunquestionable Nevertheless, virtually no paper has examined the impacts

of different currencies, especially the vehicle currency USD, on the tradebalances of various countries in the world

2.4 Research gaps

The research gaps identified by this dissertation are specified asfollows:

- First, virtually all research has ignored the roles of vehiclecurrencies, especially the USD, when examining the impacts of exchangerates on trade balances in various countries and territories in the world This

is the common limitation of the existing literature, which fails to reflect thepractice of international trade invoicing where the USD is the dominantcurrency used in the trade of any two countries regardless of the presence ofthe US This research gap is especially important in the studies on the tradebetween two non-US partners that heavily rely on the USD as a vehiclecurrency

- Second, in the existing literature, the J-curve effect is the mostcommon approach to examine the long-run and short-run impacts ofexchange rates on trade balances (Ali et al., 2014) And the majority ofpublished papers has employed the standard two-country model of Rose andYellen (1989) as the theoretical framework for scrutinizing the J-curveeffect However, the aforementioned framework neglects the role of avehicle currency Although very few empirical studies have tried toemployed it to analyze the roles of vehicle currencies in affecting tradebalances, they failed to provide persuasive explanation In other words, noresearch has explained why the standard two-country model of Rose andYellen (1989) could be used for inspecting the impacts of vehiclecurrencies’ exchange rates on trade balances

- Third, no study has scrutinized the exchange rate-trade balancelinkage in China-EU and ASEAN-EU trade at different levels of analysis.Moreover, no study has explored the impacts of the vehicle currency USD’s

exchange rates on China’s and ASEAN’s trade balances with the EUdespite their heavy reliance on the USD Thus, the remarkable shortage ofempirical evidences about the roles of the vehicle currency USD indetermining China’s and ASEAN’s trade balances with the EU is anotherresearch gap identified by this dissertation.

2.5 Research hypotheses

- Research Hypothesis 1: At each level of analysis, the use andnonuse of the vehicle currency USD have distinguishable effects on China’strade balance with the EU

- Research Hypothesis 2: At each level of analysis, the use andnonuse of the vehicle currency USD have distinguishable effects onASEAN’s trade balance with the EU

CHAPTER 3: METHODOLOGY 3.1 Explaining why the standard two-country model can be used for inspecting the role of a vehicle currency

This this section, the dissertation explains why the role of a vehiclecurrency can be incorporated into the standard two-country model Twoassumptions are made:

Assumption 1: The goods traded between the home and the foreigncountries can be concurrently invoiced by the home currency, the foreigncurrency, and a vehicle currency (e.g., USD)

Assumption 2: The trade balance is measured by the ratio of exports

to imports

The Assumption 2 is very crucial because it helps overcome the lack

of data about the proportion of the vehicle currency USD To the author’sknowledge, the shortage of the aforesaid data can be found in mostcountries, which is the huge obstacle for many empirical studies (Ito &Chinn, 2014) Thus, unless the data about the proportion of the vehiclecurrency USD are available, the traditional definition of trade balance as thedifference between exports and imports leads to the impossibility ofestimating the impacts of the use and nonuse of the vehicle currency USD

on the trade balance Employing the ratio exports/imports as a proxy for thetrade balance is a common practice in the literature, which is moreadvantageous than the traditional definition of trade balance (i.e., thedifference between exports and imports) Namely, when the trade balance iscomputed as exports divided by imports, its value is always real and notinfluenced by the unit of measurement, regardless of whether the exportsand imports are in nominal or real terms (Bahmani-Oskooee, 1991).Nevertheless, if the trade balance is calculated as the difference betweenexports and imports, it is very sensitive to the unit of measurement as well

as the nominal or real values of exports and imports, which requiresresearchers to adjust the nominal values by suitable inflation proxies such asthe consumer price index if they wish to utilize the real value In addition,the proportion of exports to imports guarantees that the trade balance isalways positive, which enables the employment of natural logarithm inregression It should be noted that in case the data about the proportion ofthe vehicle currency USD are available, the Assumption 2 can be relaxed,and both the definitions of trade balance (i.e., the difference betweenexports and imports or the ratio exports/imports) can be used