This talk will be based on the recent CISIfo Working Paper No 7825 “From Theory to Policy with Gravitas: A Solution to the Mystery of the Excess Trade Balances” by Gabriel Felbermayr and Yoto V. Yotov.
Whether or not large bilateral trade imbalances are a signal of non-reciprocal (or ‘unfair’) trade costs has been the subject of debate for some time, and was brought to the fore during President Trump’s time in office. This paper argued that if the trading partners’ average trade costs with the whole of the world are taken into account, then the ‘unfair trade’ argument does not hold up. Using standard gravity modeling, the authors find that up to 88% of the variance in bilateral balances can be explained without making any reference to asymmetries in bilateral trade costs. In other words, the scope for ‘unfair’ (i.e. non-reciprocal) bilateral trade policy is, small and on average at most 12% of variance in bilateral positions can be attributed to asymmetric trade barriers. Our results suggest that the observed bilateral trade balances can be rationalised by aggregate outcomes (driven, among other things, by countries’ fiscal and monetary policies) and by symmetric bilateral trade costs (both explicit trade policy such as tariffs and unobservable trade costs related to non-tariff trade costs or other (e.g., cultural) impediments to trade). As a result, it remains true that if a country wishes to reduce an overall trade deficit, it needs to turn towards its fiscal or monetary policy. An obsession with unfair or unbalanced bilateral trade will not take it very far.
Yoto V. Yotov, Professor,
LeBow College of Business,
Moderator: Mia Mikic, ARTNeT