Globalization, Trade Imbalances, and Labor Market Adjustment*


Dix-Carneiro, R; Pessoa, JP; Reyes-Heroles, R; Traiberman, S


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.


Dix-Carneiro, R., J. P. Pessoa, R. Reyes-Heroles, and S. Traiberman. “Globalization, Trade Imbalances, and Labor Market Adjustment*.” Q J Econ, January 2, 2023, qjac043.
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