What determines international trade flows?
Economic Shocks Reverberate in World of Interconnected Trade Ties, by Matthieu Bussière, Alexander Chudik and Giulia Sestieri Vol. 8, No. 6, July 2013, FRB Dallas Economic Letter: Renewed debate about currency wars and the question of global trade imbalances are part of a longer-running economic discussion about what drives a country’s exports and imports.
More specifically, what determines international trade flows? ... Studies of the current account—the balance of goods and services traded internationally, plus net income from abroad and net cross-border transfer payments—have long emphasized the role of the exchange rate in adjusting to excessive current account surpluses and deficits. In the context of global imbalances, several efforts have been made to estimate the magnitude of the dollar depreciation needed to reduce the U.S. trade deficit, which reached around 6 percent of gross domestic product (GDP) in the year preceding the 2008 financial crisis. However, it’s also important to take into account the role of demand because its fluctuations at home and abroad can offset relative price movements.
Based on a global vector autoregression (GVAR) macroeconomic model of trade flows, it appears that world exports respond more to an unexpected event, or shock, affecting U.S. output than to a comparable unplanned event involving the dollar. Additionally, shocks abroad bring wide-ranging responses that tend to be felt among countries with strong trading relationships. A positive bump to German output would increase output and exports among other European economies. Surprisingly, perhaps, it would also increase exports and GDP in more distant countries such as Mexico. The effect of a positive shock to Chinese imports would be especially large among other Asian countries but less so in Europe. ...