Unbalanced Trade 2.0

IMF Working Papers, September 26, 2025

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Do trade imbalances boost incomes in surplus economies at the expense of deficit economies? The paper answers "yes" for an important subclass of quantitative trade models.
The result is driven by scale economies concentrated in the traded sector: a rise in net exports causes the traded sector to expand in surplus economies, raising productivity and real income; deficit economies experience a decline in productivity and income.
Under plausible calibrations of the strength and incidence of scale economies, observed trade imbalances cause a sizeable redistribution of the gains from trade towards surplus economies.
If imbalances are modeled as the outcome of steady-state equilibrium in international asset markets, major deficit economies may prefer to correct their traded-sector underproduction by moving to financial autarky.
Financial autarky reduces global welfare and is generally not the optimal policy to bolster the traded sector in the presence of scale economies.

Scale economies concentrated in the traded sector:
- Expansion of the traded sector increases productivity in surplus economies.
- Contraction of the traded sector decreases productivity in deficit economies.
Net exports changes:
- A rise in net exports -> traded-sector expansion (surplus economies) -> higher productivity and real income.
- A decline in net exports -> traded-sector contraction (deficit economies) -> lower productivity and real income.
International asset markets and steady-state equilibria:
- When imbalances reflect steady-state asset positions, deficit economies face a policy choice to address traded-sector underproduction.

Observed trade imbalances, under plausible calibrations of the strength and incidence of scale economies, cause a sizeable redistribution of the gains from trade towards surplus economies.
Financial autarky:
- Major deficit economies may prefer financial autarky to correct traded-sector underproduction.
- However, financial autarky reduces global welfare and is typically not the optimal policy to support the traded sector when scale economies are present.

Policymakers in deficit economies should recognize that correcting traded-sector underproduction via financial autarky can be welfare-reducing globally and is generally suboptimal.
Policies aimed at bolstering the traded sector need to account for scale economies and cross-country spillovers to avoid exacerbating redistribution of gains from trade toward surplus economies.