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From Theory to Policy with Gravitas: A Solution to the Mystery of the Excess Trade Balances

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  • Felbermayr, Gabriel
  • Yotov, Yoto V.

Abstract

Bilateral trade balances often play an important role in the international trade policy debate. Disturbingly, several studies argue that the gravity model of trade fails when confronted with bilateral trade balances data, dubbing this "The Mystery of the Excess Trade Balances". Capitalizing on developments in the related literature, we solve the mystery and show that the gravity model explains bilateral trade balances well. We also uncover a new property of the structural multilateral resistances as asymmetric trade costs. This is exactly what solves the mystery. Our analysis suggests that, on average, there is little room for trade cost asymmetries due to 'unfair' policies to lead to bilateral trade imbalances. However, we also identify sectors (e.g., Mining and Services), where the modeling of the direct bilateral trade costs in the gravity model can be improved, including the possibility for 'unfair'/asymmetric policies to play a more significant role.

Suggested Citation

  • Felbermayr, Gabriel & Yotov, Yoto V., 2021. "From Theory to Policy with Gravitas: A Solution to the Mystery of the Excess Trade Balances," Kiel Working Papers 2138, Kiel Institute for the World Economy (IfW Kiel), revised 2021.
    • Handle: RePEc:zbw:ifwkwp:2138
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    2. Mahlkow, Hendrik & Wanner, Joschka, 2022. "The Carbon Footprint of Global Trade Imbalances," Conference papers 333482, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    3. Martin T Braml & Gabriel J Felbermayr, 2019. "What Do We Really Know about the Transatlantic Current Account?," CESifo Economic Studies, CESifo Group, vol. 65(3), pages 255-274.
    4. Hendrik Mahlkow & Joschka Wanner, 2023. "The Carbon Footprint of Global Trade Imbalances," CESifo Working Paper Series 10729, CESifo.
    5. Lampe , Markus & Hjortshøj O’Rourke , Kevin & Reiter , Lorenz & Yotov, Yoto, 2023. "The Empire Project: Trade Policy in Interwar Canada," School of Economics Working Paper Series 2023-5, LeBow College of Business, Drexel University.
    6. Virginia Di Nino & Anna Ekstam, 2020. "What value added in the trade balances of euro area financial centres?," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Bridging measurement challenges and analytical needs of external statistics: evolution or revolution?, volume 52, Bank for International Settlements.
    7. Felbermayr, Gabriel & Stamern, Vincent, 2021. "Transatlantischer Neustart: Vorschläge zur handelspolitischen Zusammenarbeit zwischen EU und USA," Studien, Stiftung Familienunternehmen / Foundation for Family Businesses, number 250014.
    8. Mahlkow, Hendrik & Wanner, Joschka, 2023. "The carbon footprint of global trade imbalances," W.E.P. - Würzburg Economic Papers 108, University of Würzburg, Department of Economics.
    9. Neary, Peter & Carrère, Céline & Mrázová, Monika, 2020. "Gravity without Apologies: The Science of Elasticities, Distance, and Trade," CEPR Discussion Papers 14473, C.E.P.R. Discussion Papers.
    10. Céline Carrère & Monika Mrázová & J Peter Neary, 2020. "Gravity Without Apology: the Science of Elasticities, Distance and Trade," The Economic Journal, Royal Economic Society, vol. 130(628), pages 880-910.
    11. Rosselló, Jaume & Santana-Gallego, María, 2024. "The effect of visa types on international tourism," Economic Modelling, Elsevier, vol. 137(C).
    12. Mario Larch & Jeff Luckstead & Yoto V. Yotov, 2021. "Economic Sanctions and Agricultural Trade," CESifo Working Paper Series 9410, CESifo.
    13. Yilmazkuday, Hakan, 2021. "Accounting for trade deficits," Journal of International Money and Finance, Elsevier, vol. 115(C).
    14. Mahlkow, Hendrik & Wanner, Joschka, 2023. "The carbon footprint of global trade imbalances," Kiel Working Papers 2260, Kiel Institute for the World Economy (IfW Kiel).
    15. Felbermayr, Gabriel & Stamern, Vincent, 2021. "Transatlantic restart: Proposals for trade cooperation between the EU and the United States," Studien, Stiftung Familienunternehmen / Foundation for Family Businesses, number 250017.
    16. Theresa M. Greaney & Kozo Kiyota, 2020. "Japan’s Outward FDI Potential," Working Papers 202005, University of Hawaii at Manoa, Department of Economics.
    17. Jonathan R. McFadden, 2022. "International trade and standards harmonization: The case of tractors and the OECD Tractor Codes," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(4), pages 1512-1539, August.
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    21. Valerio Della Corte & Claire Giordano, 2021. "Methodological issues in the estimation of current account imbalances," Questioni di Economia e Finanza (Occasional Papers) 617, Bank of Italy, Economic Research and International Relations Area.
    22. Greaney, Theresa M. & Kiyota, Kozo, 2020. "Japan's outward FDI potential," Journal of the Japanese and International Economies, Elsevier, vol. 57(C).
    23. Eugenia Go, 2022. "Overland and Oversea: Domestic Trade Frictions in the Philippines," Asian Development Review (ADR), World Scientific Publishing Co. Pte. Ltd., vol. 39(02), pages 75-118, September.
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    More about this item

    Keywords

    Trade Imbalances; Structural Gravity Estimation;

    JEL classification:

    • F1 - International Economics - - Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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