¶ The role of trade costs in the surge of trade imbalances

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¶ BibTeX

@article{reyes2016role,
  title={The role of trade costs in the surge of trade imbalances},
  author={Reyes-Heroles, Ricardo and others},
  journal={Princeton University, mimeograph},
  year={2016}
}

¶ Abstract

This paper shows that the decline in trade costs that underlies the increase in observed global bilateral gross trade allows has notably contributed to the surge in the size of net trade imbalances over the past four decades. To show this, I propose a framework that embeds a quantitative multi-country general equilibrium model of international trade based on Ricardian comparative advantages into a dynamic framework in which trade imbalances arise endogenously. I identify and describe two mechanisms through which declines in trade costs lead to larger imbalances in the model. By exploiting the information in bilateral trade allows, among other data, I calibrate the model and provide a decomposition that shows that 69 percent of the increase in the size of world trade imbalances can be explained by the decline in trade costs across countries. In other words, lower trade costs have not only allowed for more trade across countries in a particular point in time, but also for more trade over time. Moreover, the e§ect of lower trade costs on trade imbalances is heterogeneous across countries. In particular, trade imbalances in countries like the United States and China have been significantly affected by the decline in trade costs. I also show that the welfare gains from lower trade costs can di§er substantially from those that are obtained when changes in trade imbalances are not taken into account.

¶ My Notes

See here for notes on a related paper from the 2020 Trade Prelim.