Effective Trade Costs and the Current Account

Abstract

A view receiving increased support is that the height of trade costs in prime export sectors has a strong effect on current account balances: countries specializing in sectors that face relatively high trade costs, such as services, tend to run current account deficits, and similarly, countries specializing in low trade cost sectors, such as manufacturing, tend to run current account surpluses. To test this view, we first infer comparative advantages and trade costs, by sector, within a large sample of countries for the period 1970-2014. Then we construct effective trade costs-trade costs weighted by sectoral comparative advantage-to gauge the height of a country's overall trade costs. Results reveal that, although higher effective exporting costs are associated with lower current account balances, their impact is quantitatively limited; furthermore, the effective costs of importing often have no statistically significant effect.

Wage Growth and Inflation in Europe

“…sector, the import penetration ratio is less than 5 percent. These patterns are consistent with the higher barriers to trade in services, relative to the manufacturing sectors, as discussed in Boz, Li and Zhang (2019). Consistent with this higher exposure to foreign competition, non-energy industrial good prices tend to be closely correlated with producer prices in other countries (see, for example, Carney 2017, Forbes 2019).…”

IEO Evaluation Report

“…Most recently, the Fund has developed a new Index of Trade Uncertainty, finding that global trade uncertainty is rising sharply, having been stable at low levels for about 20 years. Research has also been conducted on trade finance data (Van Wersch, 2019); on the influence of size and income level on export diversification in LICs and small states (Lee and Zhang, 2019); the macroeconomic costs and impacts of overall tariff increases and continued trade tensions (Furceri and others, 2019); the impact of trade costs on the current account (Boz, Li, and Zhang, 2019); and on estimated gains to welfare from the African Continental Free Trade Agreement (Abrego and others, 2019). Moreover, trade developments over the last few years have led to an increase in the amount of trade-related work embedded in other workstreams, including growth, productivity and jobs, including the impacts of trade in improving productivity (Ahn and others, 2016); and the role of external factors including the terms of trade on growth accelerations and reversals in emerging market and developing economies (Gruss and others, 2018); the respective roles of trade and technology in explaining declining labor share in global income (Dao and others, 2017); and on the potential implications of tariffs or other forms of barriers to trade, including for the international allocation of production/value chains.…”

Accounting for Trade Deficits

“…The …rst component, the cumulative change in e¤ective terms of trade, represents the di¤erence between the weighted average of import prices and the weighted average of export prices, both measured at the source country; it can be connected to policies such as structural reforms to adjust export prices (as in Chinn and Ito (2007), Alfaro, Kalemli-Ozcan, and Volosovych (2008), Cheung, Furceri, and Rusticelli (2013) or Culiuc and Kyobe ( 2017)) or foreign exchange intervention (as in Bayoumi, Gagnon, and Saborowski (2015), Blanchard, Adler, and Filho (2015), or Carney ( 2017)). The second component measures the e¤ects due to the relative trade costs of the country, de…ned as the changes in the weighted average of import trade costs and the weighted average of export trade costs; it can be connected to the standard trade policies such as changes in tari¤s/duties or investment in transportation technology (as in Barattieri (2014), Obstfeld (2016), Reyes-Heroles (2016), Alessandria and Choi (2018), Eichengreen (2018), or Boz, Li, and Zhang (2019)). The third component compares the relative macroeconomic developments of the country with respect to its export partners; it can be connected to macroeconomic policies as in IMF (2018).…”

“…Alternatively, trade de…cit (surplus) of a country caused by its e¤ective terms of trade can also be rebalanced by the depreciation (appreciation) of its currency, for example, by a foreign exchange intervention or by abandoning currency manipulations (if any). 11 Second, relative trade costs a country can be connected to its bilateral protectionist policies or its composition of trading partners (that can be determined by bilateral/multilateral trade agreements) as in studies such as by Barattieri (2014), Obstfeld (2016), Reyes-Heroles (2016), Alessandria andChoi (2018), Eichengreen (2018) or Boz, Li, and Zhang (2019).…”