Unbalanced Trade 2.0

Do trade imbalances boost incomes in surplus economies at the expense of deficit economies? We show that the answer is yes in an important subclass of quantitative trade models. This is the consequence of scale economies concentrated in the traded sector. A rise in net exports causes the traded sector to expand, which raises productivity and real income in surplus economies. The flipside is a decline in productivity and income in deficit economies. Under plausible calibrations of the strength and incidence of scale economies, observed trade imbalances cause a sizeable redistribution of the gains from trade towards surplus economies. If these imbalances are modelled as the outcome of steadystate equilibrium in international asset markets, major deficit economies may prefer to correct their traded-sector underproduction by moving to financial autarky. However, financial autarky reduces global welfare and is generally not the optimal policy to bolster the traded sector in the presence of scale economies.