Economic Forces, Not Tariffs, Drive Changes in Trade Balances

IMF Blog, April 3, 2019

Source details

Canonical URL: Economic Forces, Not Tariffs, Drive Changes in Trade Balances

Other formats

Bibliographic details

Authors: Johannes Eugster, Florence Jaumotte, Margaux MacDonald, Roberto Piazza
Published: April 3, 2019

Main finding

New IMF research (Chapter 4 of the April 2019 World Economic Outlook) finds that macroeconomic factors, not tariffs, explain most of the changes in bilateral trade balances between two countries.
A tariff-induced change in a specific bilateral trade balance tends to be offset by changes in bilateral balances with other partners through trade diversion, with little or no impact on the aggregate trade balance (the sum of all the bilateral trade balances).

Evidence and scope of the analysis

Study coverage: 63 countries over 20 years and across 34 sectors.
The evolution of bilateral balances over the past two decades was largely driven by macroeconomic forces that also determine aggregate trade balances.
Macroeconomic factors cited include fiscal policy, credit cycles, demographics, weak domestic demand, exchange rate policies, and subsidies to tradable sectors (including subsidies to state-owned enterprises or to export sectors).
Changes in bilateral tariffs played a smaller role, reflecting already low tariff levels in many countries and offsetting effects from reciprocal tariff reductions.
Example contributions:
- Macroeconomic factors accounted for about 20 percent of the change in the US-Germany trade balance over 1995-2015.
- Macroeconomic factors accounted for over 95 percent of the change in the US-China trade balance over 1995-2015.

Tariffs, global value chains, and spillovers

Since the mid-1990s, the decline in trade costs (tariffs and transportation and communications costs) coincided with increased extent and complexity of global value chains.
Sharp increases in tariffs can create significant long-term economic costs and ripple effects across integrated global supply chains, leaving the global economy worse off.
A generalized 1 percentage point increase in manufacturing tariffs (not accounting for any feedback effects) has a larger negative effect on output, jobs, and productivity today than it would have in 1995 for most countries.
- The difference for Germany is about 0.5 percent of GDP.
- The difference for Korea is about 0.6 percent of GDP.
When tariff increases are targeted to specific partners, some countries may benefit from trade diversion as demand shifts to partners that face no tariffs; however, bilateral changes tend to be offset by changes with other partners, leaving aggregate trade balances broadly unchanged.

Policy implications

Focus discussion and policy action on macroeconomic factors that determine aggregate trade balances:
- Avoid distortive macroeconomic policies such as procyclical fiscal policy (providing stimulus when demand is already strong).
- Avoid heavy subsidies to exporting sectors that create excessive and possibly unsustainable imbalances.
- Targeting particular bilateral trade balances without addressing macroeconomic policies will likely lead to trade diversion with little change in the aggregate balance.
Support multilateral reductions of tariffs and other non-tariff barriers (for example, import quotas or varying product standards across countries) to benefit trade and improve longer-term economic outcomes.
When promoting trade liberalization, recognize adjustment costs for some workers and communities:
- Implement policies such as retraining and job search assistance programs, adequate social safety nets, and redistributive tax-benefit systems to help share gains from trade and protect those left behind.

Source: IMF blog post "Economic Forces, Not Tariffs, Drive Changes in Trade Balances," authors Johannes Eugster, Florence Jaumotte, Margaux MacDonald, Roberto Piazza, April 3, 2019.

Content in this bundle

関税ではなく経済的要因が貿易収支の変化を左右する
- 関税ではなく経済的要因が貿易収支の変化を左右する (Markdown version)
- 関税ではなく経済的要因が貿易収支の変化を左右する (PDF)