The new J‐curve testing methodology on the US-UK bilateral trade balance under the Brexit

This study reexamines the J‐curve hypothesis using a new methodology outside traditional practices. The increasing complexity of global bilateral trade and trade policy changes have made new methodologies inevitable. In response to this need, we create and use new forms of bilateral trade balances (BTB) rather than the traditional BTB ratio (exports/imports) constructed exclusively on total export data; this is because countries (e.g., the United States) also re‐export to other countries (e.g., the United Kingdom) some previously imported goods, besides their domestic goods. These new forms of BTBs are created based on this difference and named re‐export‐based BTB and domestic‐export‐based BTB. Hence, these newly created BTBs may also allow us to perform new J‐curve testing approaches, namely, domestic‐exports‐BTB‐based J‐curve hypothesis testing and re‐exports‐BTB‐based J‐curve hypothesis testing, separately. The main empirical finding suggests that J‐curve hypothesis testing for the USA should be performed with the methodology proposed in this study; this is because, while we supported the long‐run asymmetric J‐curve hypothesis by US domestic‐exports‐BTB‐based J‐curve hypothesis for 10 goods, the same was supported by US re‐exports‐BTB‐based J‐curve hypothesis for only 3. Additionally, the depreciated USD improves, and the Brexit process worsens the export of US domestically produced goods more than re‐exported goods.