Globalization, Trade Imbalances, and Labor Market Adjustment

Rafael Dix-Carneiro, João Paulo Pessoa, Ricardo Reyes-Heroles, Sharon Traiberman

    Research output: Contribution to journalArticlepeer-review


    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.

    Original languageEnglish (US)
    Pages (from-to)1109-1171
    Number of pages63
    JournalQuarterly Journal of Economics
    Issue number2
    StatePublished - May 2023

    ASJC Scopus subject areas

    • Economics and Econometrics


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