Effective Trade Costs and the Current Account: An Empirical Analysis

January 15, 2019

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Format: Chicago

Emine Boz, Nan Li, and Hongrui Zhang. Effective Trade Costs and the Current Account: An Empirical Analysis, (USA: International Monetary Fund, 2019) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Comparative advantage, Exports, Imports, International trade, Tariffs, Taxes, Trade balance

Keywords: Capital cost, Comparative advantage, Cost measure, Current account, Effects of trade cost, Export capability, Export cost, Exports, Global, Global imbalances, Imports, Information cost, Input cost, Nondiscriminatory import cost, Simple average, Structural gravity model, Tariffs, Trade balance, Trade cost, Trade costs, Trade restrictiveness, Trade share, Transportation cost, WP

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/008
Stock No:

WPIEA2019008
ISBN:

9781484392171
ISSN:

1018-5941

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