Effective Trade Costs and the Current Account: An Empirical Analysis

A view receiving increased support is that the height of trade costs in prime export sectorshas a strong effect on current account balances: countries specializing in sectors that facerelatively high trade costs, such as services, tend to run current account deficits, andsimilarly, countries specializing in low trade cost sectors, such as manufacturing, tend torun current account surpluses. To test this view, we first infer comparative advantages andtrade costs, by sector, within a large sample of countries for the period 1970-2014. Thenwe construct effective trade costs-trade costs weighted by sectoral comparativeadvantage-to gauge the height of a country's overall trade costs. Results reveal that,although higher effective exporting costs are associated with lower current accountbalances, their impact is quantitatively limited; furthermore, the effective costs ofimporting often have no statistically significant effect.