Asymmetric Trade Reforms and External Adjustment : Theory and Evidence from China

This paper quantifies the effects of China’s trade reforms on the current account in its post-WTO period since 2001. We first present cross-country evidence to show that the adjustment of the current account to WTO access in China differs from those in other countries, exhibiting a hump-shaped pattern. We then document some institutional facts and firm-level evidence and argue that asymmetric trade reforms between exporting and importing sectors in China may help to explain the pattern. Motivated by these facts, we develop a two-country dynamic Melitz model and applied it to the Chinese economy. Our quantification exercise shows that the trade reform not only accounts for 47.6 percent of the accumulated trade surplus in 2001-2010 but also contributes to the hump-shaped dynamics of the trade balance and the real exchange rate. Finally, we apply this model to estimate the welfare loss of the U.S.-China trade war