## Trade Balances Mostly Driven by Economic Forces, Not Tariffs

_IMF Blog, July 10, 2019_

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**Canonical URL:** [Trade Balances Mostly Driven by Economic Forces, Not Tariffs](https://www.imf.org/en/blogs/articles/2019/07/10/blog-trade-balances-mostly-driven-by-economic-forces-not-tariffs)

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## Bibliographic details
- Authors: The Editors
- Published: July 10, 2019

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### Key findings from IMF research
- Over the past two decades, most of the changes in bilateral trade balances were explained by macroeconomic factors.
- Macroeconomic factors include fiscal policy, demographics, and weak domestic demand; they may also include exchange rate policies and domestic supply-side policies, like subsidies to state-owned enterprises or to export sectors.
- Changes in tariffs played a much smaller role in influencing bilateral trade balances.
- The April World Economic Outlook chart quantifies contributions of: macroeconomic factors, tariffs, and production organization (the sectoral composition of countries’ production and demand) to changes in bilateral trade balances.
- Examples from the figure:
  - Macroeconomic factors accounted for about 20 percent of the change in the US-Germany trade balance from 1995 to 2015.
  - Macroeconomic factors accounted for over 95 percent of the change in the US-China trade balance from 1995 to 2015.
- Reciprocal tariff reductions offsetting each other and already low tariff levels in many countries help explain the small role of tariffs.
- Imposing a bilateral tariff on a trading partner is ineffective to address aggregate trade imbalances because consumers can switch demand to other trading partners that face no tariffs.
- Increases in tariffs would particularly hurt output, jobs, and productivity.
- The integrated nature of the current global trade system implies a sharp increase in tariffs would create ripple effects across countries and leave the world economy worse off.

### Policy recommendations
- Continue to promote free and fair trade by undoing recently enacted tariffs and enhancing efforts to reduce existing barriers to trade.
- Avoid policies that distort the economy, such as:
  - governments stimulating the economy with additional spending when demand is already strong, or
  - heavily subsidizing exporting sectors,
  that create excessive—and possibly unsustainable—imbalances.

*Source: IMF blog post “Trade Balances Mostly Driven by Economic Forces, Not Tariffs”, The Editors, July 10, 2019.*

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## References

- [Português](http://www.imf.org/pt/News/Articles/2019/07/10/blog-trade-balances-mostly-driven-by-economic-forces-not-tariffs)
- [World Economic Outlook](https://www.imf.org/en/publications/weo)
- [https://www.imf.org/wp-content/uploads/2019/07/econforces.png](https://www.imf.org/wp-content/uploads/2019/07/econforces.png)

_Source: https://www.imf.org/en/blogs/articles/2019/07/10/blog-trade-balances-mostly-driven-by-economic-forces-not-tariffs_