We argue that modeling trade imbalances is crucial for understanding transitional dynamics in response to globalization shocks. We build and estimate a general equilibrium, multicountry, multisector model of trade with two key ingredients: (i) endogenous trade imbalances arising from households? consumption and saving decisions; (ii) labor market frictions across and within sectors. We use our model to perform several empirical exercises. We find that the ?China shock? accounted for 28% of the decline in U.S. manufacturing between 2000 and 2014-1.65 times the magnitude predicted from a model imposing balanced trade. A concurrent rise in U.S. service employment led to a negligible aggregate unemployment response. We benchmark our model?s predictions for the gains from trade against the popular ACR sufficient-statistics approach. We find that our predictions for the long-run gains from trade and consumption dynamics significantly diverge.

---

2 January 2023

---

The Quarterly Journal of Economics 138(2) , pp.1109-1171, 2023

---

DOI: 10.1093/qje/qjac043

https://academic.oup.com/qje/article/138/2/1109/6967141

This Journal article is published under the centre's Trade programme.