Does dollar-pegging matter? A closer look at US trade deficits with China and Germany.

China and Germany are comparable in terms of having persistent trade surplus with the USA, but they differ in how their currencies are valued. By invoking the China–Germany comparison, this paper finds that there is weak, if any, statistical association between the US trade deficit and the exchange rate. This finding is robust to long-run vs. short-run horizon, without vs. with an instrumental variable, and in-sample fitting vs. out-of-sample forecasting. This paper predicts that the US trade deficits with China and Germany will continue to rise in the presence of a recovery in the US economy. [ABSTRACT FROM AUTHOR]