Working Paper: NBER ID: w25563
Authors: George A. Alessandria; Horag Choi
Abstract: We study how changes in trade barriers contributed to the dynamics of the US trade balance and real exchange rate since 1980 - a period when trade tripled. Using two dynamic trade models, we decompose fluctuations in the trade balance into terms related to trade integration (global and unilateral) and business cycle asymmetries. We find three main results. First, the relatively large US trade deficits as a share of GDP in the 2000s compared to the 1980s mostly reflect a rise in the trade share of GDP. Second, controlling for trade, only about 60 percent of net trade flows are due to business cycle asymmetries. And third, about two-thirds of the contribution of business-cycle asymmetries are a lagged response. For instance, the short-run Armington elasticity is about 0.2 while the long-run is closer to 1.12 with only 6.9 percent of the gap closed per quarter. We show that a two-country IRBC model with a dynamic exporting decision, pricing-to-market, and trade cost shocks can account for the dynamics of the US trade balance, real exchange rate, and trade integration. The model clarifies how permanent and transitory changes in trade barriers affect the trade balance and how to identify changes in trade barriers. We also show the effect of temporary trade policies on the trade balance depends on whether they induce a trade war.
Keywords: No keywords provided
JEL Codes: E32; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade integration (F15) | trade balance (F14) |
| business cycle asymmetries (E32) | trade dynamics (F14) |
| business cycle asymmetries (E32) | lagged response of trade balance (F14) |
| trade barriers (F14) | trade balance (F14) |
| temporary trade policies (F13) | lasting impacts on trade balance (F69) |
| trade costs (F19) | trade balance (F14) |
| trade barriers (F14) | real exchange rate (F31) |