Working Paper: CEPR ID: DP15806
Authors: Jiandong Ju; Kang Shi; Shangjin Wei
Abstract: This paper studies the effects of trade liberalization on capital flows in a dynamic Heckscher-Ohlin model, and makes four contributions. First, we identify an interest rate over-determination problem in such a model, and solve it with an endogenous discount factor. Second, we show that a trade liberalization in a developing country generally leads to a greater current account surplus, which is the exact opposite of a common but partial equilibrium intuition. Third, factor market reforms reinforce the effect of the trade liberalization on capital outflows. Finally, our calibrations suggest that China's accession to the WTO is likely an important factor driving the rise of its current account surplus.
Keywords: trade reforms; trade surplus; WTO accession; China
JEL Codes: F13; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization in developing countries (F63) | greater current account surplus (F32) |
| reducing import barriers on capital-intensive goods (F14) | decrease in domestic return to capital (F21) |
| decrease in domestic return to capital (F21) | capital outflows (F32) |
| capital outflows (F32) | greater current account surplus (F32) |
| factor market reforms (P23) | amplify effects of trade liberalization on capital outflows (F32) |
| improvements in domestic financial systems (P34) | larger current account surpluses following trade reforms (F32) |
| China's accession to the WTO and subsequent trade reforms (F13) | rise in current account surplus (F32) |
| initial increase in current account surplus (F32) | decline as economy converges to new steady state (F62) |