Bilateral Trade Imbalances

IMF Working Papers, May 13, 2022

Source details

If sectoral trade flows obey structural gravity, countries' bilateral trade imbalances are the result of macro trade imbalances, “triangular trade”, or pairwise asymmetric trade barriers.
Using data for 40 major economies and the Rest of the World, the authors show that large and pervasive asymmetries in trade barriers are required to account for most of the observed variation in bilateral imbalances.
A dynamic quantitative trade model suggests that eliminating these asymmetries would significantly reduce bilateral (but not macro) imbalances and have sizeable impacts on welfare.
Evidence is provided that the asymmetries measured are in part related to the policy environment: trade inside the European Single Market appears to be subject to more bilaterally symmetric frictions.
Extending the same symmetry to all parts of the global economy would give a large boost to the real incomes of several non-E.U. countries.

Data scope: 40 major economies and the Rest of the World.
Main drivers of bilateral imbalances identified: macro trade imbalances; “triangular trade”; pairwise asymmetric trade barriers.
Required explanation: large and pervasive asymmetries in trade barriers are necessary to account for most observed variation in bilateral imbalances.
Policy environment link: trade inside the European Single Market shows more bilaterally symmetric frictions compared with other parts of the world.

A dynamic quantitative trade model indicates:
- Eliminating trade-wedge asymmetries would significantly reduce bilateral imbalances.
- Eliminating asymmetries would not significantly change macro imbalances.
- Eliminating asymmetries would have sizeable impacts on welfare (real incomes).

Reducing pairwise asymmetric trade barriers can materially lower bilateral trade imbalances.
Promoting bilaterally symmetric trade frictions—similar to those observed within the European Single Market—could raise real incomes for several non-E.U. countries.
Policy focus on harmonizing trade frictions across partners may yield welfare gains without necessarily altering macro trade balances.

Subject: Exports, Imports, International trade, Plurilateral trade, Trade balance, Trade barriers
Keywords: estimating trade wedge, Exports, Global, gravity, Imports, Plurilateral trade, sectoral trade flow, Trade balance, Trade barriers, trade cost, trade imbalances, trade model, trade wedges, trade-wedge asymmetry