Working Paper: NBER ID: w28315
Authors: Rafael Dix-Carneiro; Joo Paulo Pessoa; Ricardo M. Reyes-Heroles; Sharon Traiberman
Abstract: We argue that modeling trade imbalances is crucial to understanding transitional dynamics in response to globalization shocks. We build and estimate a general equilibrium, multi-country, multi-sector model of trade with two key ingredients: (a) endogenous trade imbalances arising from households' consumption and saving decisions; (b) labor market frictions across and within sectors. We use our model to perform several empirical exercises. We find that the “China shock” accounted for 25% of the decline in US manufacturing between 2000 and 2014—twice the magnitude predicted from a model imposing balanced trade. A concurrent rise in US service employment led to a negligible aggregate unemployment response. We then benchmark our model's predictions for the gains from trade against the popular “ACR” sufficient statistics approach. We find that our predictions for the long-run gains from trade and consumption dynamics significantly diverge.
Keywords: Globalization; Trade Imbalances; Labor Market Adjustment
JEL Codes: F1; F16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| China shock (F69) | decline in US manufacturing (O14) |
| China shock (F69) | rise in US service employment (J68) |
| rise in US service employment (J68) | mitigate aggregate unemployment responses (E24) |
| trade imbalances (F14) | dynamics of job losses and gains (J63) |
| changes in Chinese productivity and trade costs (F12) | deterioration in US trade deficit (F14) |
| trade surpluses and deficits (F10) | unemployment (J64) |