An IS-LM Equilibrium Analysis on Trade Balance and Exchange Rate during the China-US Trade

Abstract

This study examines the China-US trade and its impact on the US trade deficit during 2017-2022. It employs the IS–LM equilibrium model and multiple linear regressions to examine how various phases of trade tariff, the US government deficit, and the bilateral foreign exchange rate affect the US trade deficit. It shows that the Phases 2 & 3 tariffs initiated by the US have a significant impact on China-US trade. It also reveals that the US government deficit has a major contribution to the US trade imbalance. In sum, the results are consistent with the interest rate parity (IRP) theory and the theory of comparative advantage, suggesting that protectionism is unsuccessful in solving international trade imbalance.