Asymmetric trade liberalizations and current account dynamics

Abstract

In this paper, I show a strong positive correlation between the value-added share of manufacturing in 2000 and current account balances in 2007 for the Euro area countries. I propose asymmetries in the timing of trade liberalizations as a new mechanism affecting the dynamics of the current account. I build intuition using a simple model. Then, I use an international business cycle model to show how the asymmetric dynamics of trade costs in manufacturing and services in 2000-2007 can partially explain the rise in the German surplus. Lastly, I provide broad empirical support for the key predictions of the theory.