IMF Economic Review

, Volume 65, Issue 3, pp 633–674 | Cite as

Trade Integration and the Trade Balance in China

  • George AlessandriaEmail author
  • Horag Choi
  • Dan Lu


We study China’s growth and integration (trade and financial) in a two-country DSGE model with a dynamic exporting decision, pricing-to-market, incomplete financial markets, and aggregate shocks to trade barriers, productivity, and preferences. We estimate the changes in technology, trade costs, and preferences accounting for the dynamics of China’s gross and net trade flows, export participation, real exchange rate, and growth from 1990 to 2014. We find a large unanticipated decline in bilateral trade barriers with persistent, but not permanent, innovations that include an important gradual, phased-in component. Since the Great Recession, average bilateral barriers have stabilized at low levels even as barriers on Chinese imports have risen substantially relative to exports. Trade stagnation since 2011 largely reflects the completed transition to past trade reforms rather than an increase in trade barriers or reversal in the expected pace of future integration. Trade is forecast to decline almost 1 percent per year starting in 2017. Changes in trade barriers are an important determinant of China’s trade balance and its accumulation of foreign assets, accounting for as much as 70 percent of the foreign assets accumulated by 2014. Shocks to trade barriers and in China are found to have increased ROW consumption by 11.9 percent and employment by 0.6 percent but lowered ROW output by less than 1 percent relative to 1990.

JEL Classification

E31 F12 

Supplementary material (68.1 mb)
Supplementary material 1 (zip 69,758 KB)


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Copyright information

© International Monetary Fund 2017

Authors and Affiliations

  1. 1.University of Rochester and NBERRochesterUSA
  2. 2.Monash UniversityMelbourneAustralia
  3. 3.University of RochesterRochesterUSA

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