China’s Economic Growth and Trade with the United States

In this paper, we examine the direction of causality between US-China (bilateral) trade and GDP growth in China. We do so by performing Granger causality tests and estimating VAR equations on relevant variables and data covering the period 1985-2013. The empirical results indicate that imports from the US have benefited China and in turn Chinese's GDP growth has led to more imports from the US. However, we fail to find statistical evidence in support of a direct positive impact from exporting to the US on Chinese GDP growth. We identify a potential indirect effect through the interplay of inward FDI and China's exports to the US. We discuss the main policy implications of these findings.