The Volatilities of Chinese and American Trade with Africa: Which Country’s Trade Volatility is the Most Influential?

Abstract

Abstract This paper examines the relative influence of the volatilities of Chinese and American trade with Africa, by exploring the volatilities, their comovements, and four potential international drivers that can increase or decrease the volatilities. The drivers considered are Euro Area’s trade with Africa; U.S. recessions; economic globalization; and fluctuations in China’s economy. The paper employs the dynamic conditional correlation (DCC-) generalized autoregressive conditional heteroscedasticity (GARCH) model and monthly data spanning 1970M1 to 2020M07. The results show that, without controlling for drivers, the volatilities of Chinese and American trade with Africa are quite high, with similar magnitudes and significant comovements. When drivers are controlled for, Euro Area’s trade does not influence the volatilities significantly. However, America’s recessions make Chinese trade volatility to become higher, while economic globalization makes it to become lower, relative to America’s trade volatility. These results imply that Chinese trade volatility is more influential than America’s trade volatility, due to two international drivers. Furthermore, fluctuations in China’s economy significantly influence the trade volatility of China itself and the trade volatility of the bigger economy, the U.S., which confirms China’s significant international influence. One of the key policy implications of these findings is that globalization does not necessarily increase trade volatility in all contexts. This paper provides new evidence that in the context of a single trade market, globalization is an antidote of trade volatility because it involves the availability of diverse markets across the global economy, which consequently reduces the panic of traders within the single market.