Economic Diplomacy and Bilateral Trade: Evidence From Chinese Swap Lines

ABSTRACT China's bilateral currency swap lines have become a prominent instrument of financial diplomacy and an increasingly important component of the evolving international monetary system, yet their implications for international trade remain insufficiently understood. This paper examines the effects of China's swap line arrangements on bilateral goods and services trade over the period 2009–2023. Employing a structural gravity framework, panel local projections, and a newly assembled dataset on renminbi (RMB) swap agreements, we find that access to RMB liquidity increases bilateral trade, with the strongest and most robust effects concentrated in goods trade. By contrast, the impact on services trade is generally weak and statistically insignificant, reflecting the continued dominance of U.S. dollar invoicing and the lower dependence of services sectors on trade finance and liquidity support. The dynamic effects are economically meaningful but largely transitory, suggesting that swap lines primarily alleviate short‐term frictions rather than induce lasting changes in trade patterns. The evidence is consistent with two complementary mechanisms: a liquidity channel that relaxes financing constraints and reduces reliance on foreign‐currency funding, and a signaling channel that strengthens expectations of sustained bilateral economic cooperation. Overall, the results suggest that China's swap network functions not only as a financial safety net but also as a strategic instrument of economic diplomacy that supports trade integration and reinforces the international role of the RMB.