DP9293 Trade Reforms and Current Account Imbalances: When Does the General Equilibrium Effect Overturn a Partial Equilibrium Intuition?

Author(s): Jiandong Ju, Kang Shi, Shang-Jin Wei
Publication Date: January 2013
Keyword(s):
JEL(s): F3, F4
Programme Areas: International Macroeconomics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9293

In partial equilibrium, a reduction in import barriers may be thought to lead to an increase in imports and a reduction in trade surplus. However, the general equilibrium effect can go in the opposite direction. We study how trade reforms affect current accounts by embedding a modified Heckscher-Ohlin structure and an endogenous discount factor into an intertemporal model of current account. We show that trade liberalizations in a developing country would generally lead to capital outflow. In contrast, trade liberalizations in a developed country would result in capital inflow. Thus, efficient trade reforms can contribute to global current account imbalances, but these imbalances do not need policy