DP15806 Trade Reforms and Current Account Imbalances

Author(s): Jiandong Ju, Kang Shi, Shang-Jin Wei
Publication Date: February 2021
Keyword(s): China, trade reforms, trade surplus, Wto accession
JEL(s): F13, F32
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15806

This paper studies the effects of trade liberalization on capital flows in a dynamic Heckscher-Ohlin model, and makes four contributions. First, we identify an interest rate over-determination problem in such a model, and solve it with an endogenous discount factor. Second, we show that a trade liberalization in a developing country generally leads to a greater current account surplus, which is the exact opposite of a common but partial equilibrium intuition. Third, factor market reforms reinforce the effect of the trade liberalization on capital outflows. Finally, our calibrations suggest that China's accession to the WTO is likely an important factor driving the rise of its current account surplus.