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

Jiandong Ju, Kang Shi, Shang-Jin Wei

NBER Working Paper No. 18653
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".

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