Unfair Bilateral Trade Imbalances

Contrary to the quasi-unanimous academic consensus, we argue that bilateral trade imbalances may be relevant for trade policy. To this end, we employ the workhorse trade model -- the gravity equation -- as a forensic tool to detect deviations of the actual bilateral trade imbalances from their predicted "fair" counterparts, which are constructed based on fully symmetric bilateral trade costs and while taking into account all country-specific characteristics, such as macroeconomic conditions or comparative advantage. Zooming in on the United States, we find that 92% of the existing U.S. bilateral trade imbalances can be explained without relying on asymmetric bilateral trade costs. Thus, there is little room for non-reciprocal bilateral trade barriers to lead to bilateral trade imbalances. However, we also detect some systematic bilateral trade cost asymmetries between the U.S. and certain countries and industries, which could meaningfully inform bilateral policy discussions.