Currency wars: China and the USA and its impact on Turkey

Domestic wealth created by international trade has directed many countries to foreign trade. Especially in instable and tough periods like war and crisis, countries make interventions on exchange rate in order not to lose the wealth of foreign trade and keep currency wars by means of competitive devaluations. While creating domestic employment and production by depreciating national currency, countries increase their exports and affect their partners' foreign trade in a negative way. After World War II, currency wars eliminated gradually by global agreements and exchange rates left to float freely around the world since the beginning of 1980s. However, China, one of the biggest economies of the world, intervenes time to time in exchange rates for diverse reasons and revives the concept of currency wars. In this study, effects of exchange rate and Industrial Production Index of partner country on bilateral export of China-the USA and China-Turkey are investigated for 1999M1-2015M12 period by a total of four models, two for China-the USA and two for China Turkey. Stationarity of the series is analyzed by ADF, PP, KPSS and Kapetanios unit root tests and it is seen that the series are stationary when their first difference is taken, that is, they are I(1). Causality relationships within series was investigated by Granger and Toda-Yamamoto causality tests and it is determined that each model have causality relationship within itself. Cointegration relationship of the series within each model is researched by Maki test allowing structural breaks and it is found that variables of each model are cointegrated. Long and short term analyses were completed with DOLS method and long term coefficients were obtained. Moreover, it is seen that short term error correction mechanism of the models are operating.