The impacts of exchange rate on US adjusted bilateral trade balance with Germany under Brexit: A comparative analysis

Abstract

AbstractThis study reveals the hidden dynamics of USA‐Germany international trade through a revised J‐curve hypothesis. It emphasizes the inadequacy of the traditional Bilateral Trade Balance (BTB) ratio based on total exports. To this aim, it introduces two new testing approaches based on adjusted BTB: the GDP‐driven‐BTB‐based J‐curve hypothesis (GDPJ) and the Non‐GDP‐driven‐BTB‐based J‐curve hypothesis (NGDPJ). The empirical findings advocate the necessity of these alternative tests, offering policymakers more informative results than the traditional approach. GDPJ is validated for 13 goods, while NGDPJ and traditional methods are validated for 10 and 8 goods. These results underscore the risks of solely relying on the traditional approach. By embracing the revised J‐curve hypothesis and alternative BTBs, policymakers can gain deeper insights into the USA‐Germany trade relationship. One interpretation is that, under Brexit, German consumers reduce their purchases of re‐exported goods more than domestically produced goods from the US.