Trade, FDI, and Global Imbalances

Abstract

We propose a multi-country dynamic general equilibrium model to quantify the implications of trade and FDI liberalizations for the surge of global trade and current account (CA) imbalances. We calibrate our model to replicate the evolution of bilateral trade and FDI flows across 5 major economies as well as their CA balances over 1996–2014. Our counterfactual experiments suggest that the decline in trade and FDI costs accounts for about half of the increase in global trade imbalances and a quarter of the increase in CA imbalances over this period. Moreover, we find that the openness of the Chinese economy after 2001 has little impacts on global imbalances, whereas the unbundling of the U.S. outward FDI is a major driver of global imbalances.