DP15805 The Welfare Cost of a Current Account Imbalance: A 'Clean' Channel

Author(s): Jungho Lee, Shang-Jin Wei, Jianhuan Xu
Publication Date: February 2021
Keyword(s): and transportation cost, pollution, trade surplus
JEL(s): F18, F32
Programme Areas: International Trade and Regional Economics, Development Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15805

A current account surplus is associated with a welfare loss, according to the existing open-economy macroeconomics literature, only when there are distortions in either savings or investment. We propose a new source of welfare loss even in the absence of such distortions. In particular, a trade surplus, the largest component of a current account surplus for most countries, can alter the shipping costs and the composition of a country's imports and exports in ways that tend to raise the pollution level of the country. Thus, when its pollution tax is low, a trade surplus can produce a welfare loss outside the standard channels.