Tuesday, July 23

What factors affect the bilateral trade balance

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The IMF presented the result of a new study on the state of the world economy. Experts explored the reasons that affect the development of bilateral trade and changes in balances. In their opinion, macroeconomic factors play an important role.

Relationship between macroeconomics and bilateral trade balances

The bilateral trade balance represents the difference between export and import prices. Much attention has recently been paid to this indicator. Some experts believe that an increase in the balance is not natural and may distort the arrangements for trade between countries.
The IMF provided its assessment, detailing the impact of balances on macroeconomic processes. Increases between two partners are offset by stable performance with other countries or by trade diversion.
For 20 years, the main causes of balance changes have been macroeconomic factors rather than tariff increases or decreases. Exchange rate fluctuations in the global foreign exchange market, reforms in the foreign trade segment, and fiscal processes have affected the specific features of bilateral trade.

Tariffs undoubtedly contribute to this. The world economy is characterized by a complex formation of value added, due to the different stages of production in different countries. In this case, tariff increases contribute to higher economic costs and slower development.
The study selected 63 countries with bilateral trade balances for 34 industries over 20 years. The roles and functions of macroeconomic factors, tariffs and production characteristics were highlighted for the study.
The results of the study showed that the dynamics of the balance were more influenced by the processes in macroeconomics, including demographic, fluctuations in domestic demand for products, subsidization of state enterprises and others.
Bilateral tariffs did not play a major role, rather they had a neutralizing effect in the event of a reduction in rates by both States.
The current relationship between the US and China is clear proof of such conclusions of experts. Their trade balance is 95 per cent dependent on the processes in macroeconomics. In the case of Germany and the U.S., these factors regulate indicators by 20%.
Tariffs should be considered in the long term. Their changes have a direct impact on production.
In the 90s, the reduction of duties allowed us to increase and expand the components of value added. As a result, countries increased production volumes, which gave new jobs. In case of tariff increase, reverse processes will be launched, which will have a negative impact on the development of the world economy.
Changing rates for some countries may mean an improvement for others through trade diversion.


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