Bilateral Trade Imbalances

In standard quantitative models, bilateral trade imbalances are determined by aggregate trade imbalances, expenditure and production patterns, and trade wedges. We calibrate such a model using recent data on incomes, factor endowments, and sector-level expenditures, outputs and bilateral trade flows for 40 economies and the rest of the world. Large pairwise asymmetries in trade wedges are needed for the model’s bilateral-trade predictions to match the data. They account for 21-35% of the standard deviation of bilateral trade imbalances. Aggregate imbalances play a minor role, while more than 50% of the variation is explained by international differences in production and expenditure patterns.