Shang-Jin Wei: Trade reforms and current account imbalances: When does the general equilibrium effect overturn a partial equilibrium intuition?

 

 

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

Jiandong Ju, Kang Shi, Shang-Jin Wei

Issued in December 2012

 

While a reduction in import barriers in a partial equilibrium may be thought to lead to an increase in imports and a reduction in trade surplus, 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 "corrections".