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From Theory to Policy with Gravitas: A Solution to the Mystery of the Excess Trade Balances

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  • Gabriel J. Felbermayr
  • Yoto V. Yotov

Abstract

Bilateral trade balances often play an important role in the international trade policy debate. Disturbingly, several studies argue that the gravity model of trade fails when confronted with bilateral trade balances data, dubbing this “The Mystery of the Excess Trade Balances”. Capitalizing on developments in the related literature, we solve the mystery and show that the gravity model explains bilateral trade balances well. We also uncover a new property of the structural multilateral resistances as asymmetric trade costs. This is exactly what solves the mystery. Our analysis suggests that, on average, there is little room for trade cost asymmetries due to ‘unfair’ policies to lead to bilateral trade imbalances. However, we also identify sectors (e.g., Mining and Services), where the modeling of the direct bilateral trade costs in the gravity model can be improved, including the possibility for ‘unfair’/asymmetric policies to play a more significant role.

Suggested Citation

  • Gabriel J. Felbermayr & Yoto V. Yotov, 2019. "From Theory to Policy with Gravitas: A Solution to the Mystery of the Excess Trade Balances," CESifo Working Paper Series 7825, CESifo.
    • Handle: RePEc:ces:ceswps:_7825
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    4. Greaney, Theresa M. & Kiyota, Kozo, 2020. "Japan's outward FDI potential," Journal of the Japanese and International Economies, Elsevier, vol. 57(C).
    5. Virginia Di Nino & Anna Ekstam, 2020. "What value added in the trade balances of euro area financial centres?," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Bridging measurement challenges and analytical needs of external statistics: evolution or revolution?, volume 52, Bank for International Settlements.
    6. Mahlkow, Hendrik & Wanner, Joschka, 2022. "The Carbon Footprint of Global Trade Imbalances," Conference papers 333482, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
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    8. Martin T Braml & Gabriel J Felbermayr, 2019. "What Do We Really Know about the Transatlantic Current Account?," CESifo Economic Studies, CESifo Group, vol. 65(3), pages 255-274.
    9. Mario Larch & Yoto V. Yotov, 2024. "Estimating the effects of trade agreements: Lessons from 60 years of methods and data," The World Economy, Wiley Blackwell, vol. 47(5), pages 1771-1799, May.
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    11. Jonathan R. McFadden, 2022. "International trade and standards harmonization: The case of tractors and the OECD Tractor Codes," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(4), pages 1512-1539, August.
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    13. Céline Carrère & Monika Mrázová & J Peter Neary, 2020. "Gravity Without Apology: the Science of Elasticities, Distance and Trade," The Economic Journal, Royal Economic Society, vol. 130(628), pages 880-910.
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    16. Mahlkow, Hendrik & Wanner, Joschka, 2023. "The carbon footprint of global trade imbalances," W.E.P. - Würzburg Economic Papers 108, University of Würzburg, Department of Economics.
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    19. Yoto V. Yotov, 2022. "On the role of domestic trade flows for estimating the gravity model of trade," Contemporary Economic Policy, Western Economic Association International, vol. 40(3), pages 526-540, July.
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    21. Mahlkow, Hendrik & Wanner, Joschka, 2023. "The carbon footprint of global trade imbalances," Kiel Working Papers 2260, Kiel Institute for the World Economy (IfW Kiel).
    22. So, Roger Yu & Bekkers, Eddy, 2024. "The trade effects of a new agreement on services domestic regulation," WTO Staff Working Papers ERSD-2024-02, World Trade Organization (WTO), Economic Research and Statistics Division.
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    More about this item

    Keywords

    trade imbalances; structural gravity estimation;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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