Abstract
Along with the rapid growth of the Chinese economy in recent years, the cross- strait relationship and trade have strengthened. During the recent 30 years, China’s exchange rate system has changed from the U.S dollar pegged rate system to the managed floating rate system. What will this phenomenon affect the bilateral trade? This study first examines the impact of exchange rate and trade flows between Taiwan and China with their main trading partner by undertaking the gravity model. Also country fixed effect is taking into account. Our findings indicate that the exchange rate volatility has the negative effect on the bilateral trade. Then adopting VAR model to analyze the bilateral trade, and the products are categorized into 21 types according to the HS code. Exchange rate affects the export side almost on the positive way which conforms to the theory. Additionally, there are some products have J curve. On the other hand, the import side is facing longer lag as a result of exchange rate.