PIIE this week released a new working paper arguing that fiscal and exchange rate policies are the primary drivers of trade imbalances, with governments able to directly influence their current account positions through these levers.
The working paper states that tariffs, by contrast, do not have a major impact on trade balances, undermining their use as a tool to reduce deficits.
Quote from the working paper:
Global trade imbalances have gained attention following President Donald Trump’s reelection, with China’s trade surplus increasing and the US trade deficit remaining historically high. This paper estimates models that can explain nearly half of the historical imbalances, with a large share of the imbalances arising from government policies. The evidence strongly suggests that governments can buy current account surpluses. The paper extends previous research (Gagnon and Sarsenbayev 2021) by six years and roughly 1,000 observations.
Read the full working paper: How to buy a trade surplus