David D. Shin

Are persistent trade imbalances signs of distortions? This paper investigates the drivers of persistent trade imbalances in eight advanced and emerging economies from 2000 to 2014. Using a dynamic general equilibrium framework, I rationalize the observed imbalances as outcomes of six key forces commonly discussed in the literature: (i) productivity growth, (ii) trade costs, (iii) financial frictions, (iv) life expectancy, (v) population growth, and (vi) economy-specific intertemporal distortions. The findings highlight that economy-specific intertemporal distortions, particularly in the United States, are the most significant driver of global imbalances. Additionally, changes in trade costs between China and its trading partners---the China shock---had a substantial impact on the trade imbalances of both China and the U.S. The results suggest that, without the China shock, the U.S. would have sustained persistent trade surpluses, while China would have experienced persistent deficits, emphasizing the importance of bilateral trade frictions in understanding global imbalances.

Presentation: Duke University 2023; Federal Reserve Bank of Richmond 2023; International Monetary Fund 2023; Economics Graduate Student Conference (WUSTL) 2023; Midwest International Trade & Theory Conference (Georgia Tech) 2023; Mid-Atlantic International Trade Workshop (Federal Reserve Board) 2024