Trade balances mostly driven by economic forces, not tariffs, reveals IMF research

Trade balances mostly driven by economic forces, not tariffs, reveals IMF research

Agency News

Washington, April 4 : Most of the changes in bilateral trade balances over the past two decades can be explained by the combined effect of macroeconomic factors, while tariff variations played a much smaller role, according to a new research by the International Monetary Fund (IMF).

The research was released on Wednesday as an analytical chapter of the April 2019 World Economic Outlook. The IMF team's work was based on a study of 63 countries over 20 years (1995-2015) and across 34 sectors.

The evolution of bilateral balances over the past two decades has been, "to a significant extent," driven by macroeconomic forces, which include fiscal policy, demographics and domestic demand, the research team said. Exchange rate policies and subsidies to trading sectors are also among the factors.Despite relatively smaller impact on the evolution of bilateral trade balances, tariffs matter in different ways, the team said.

The research showed that when tariff increases are targeted to specific partners, some countries might benefit from "trade diversion" as the demand from the country imposing the tariff is switched to countries that face no tariffs. Hence, changes in the bilateral trade balance with specific partners, triggered by bilateral tariffs, tend to be "offset" by changes in bilateral trade balances with other trade partners, leaving the aggregate trade balance "broadly unchanged."

A sharp increase in tariffs, however, would create a "ripple effect" in an integrated global trade system and undermine the world economy, the team argued."We find that increases in tariffs would particularly hurt output, jobs, and productivity, not only for those economies directly imposing and facing them, but also for other countries up and down the value chains," researchers said.The IMF team advised policymakers to avoid distortive macroeconomic policies such as procyclical fiscal policy or heavily subsidizing exporting sectors that create excessive and possibly unsustainable imbalances.

The second major policy conclusion is that multilateral reductions in tariffs and other nontariff barriers will benefit trade and, over the longer term, improve macroeconomic outcomes.The team suggested policymakers continue to promote free and fair trade by undoing recently enacted tariffs and enhancing efforts to reduce existing barriers to trade. (UNI)