Connecting the (dirty) dots: Current account surplus and polluting production

• Main Authors: Lee, Jungho, WEI, Shang-Jin, XU, Jianhuan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2023
• Subjects: Econometrics; Economic Theory
• Online Access: https://ink.library.smu.edu.sg/soe_research/2422; https://ink.library.smu.edu.sg/context/soe_research/article/3421/viewcontent/Trade_cost.pdf
• Institution: Singapore Management University

According to the existing open-economy macroeconomics literature, a current account surplus is associated with a welfare loss only when distortions exist in either savings or investment. We propose a new welfare effect even in the absence of such distortions. In our theory, a trade imbalance − the largest component of a current account imbalance − interacts with a country’s pollution control (“cleanness”) regime to generate welfare effects outside the standard channels. In particular, a trade surplus alters the shipping costs and composition of a country’s imports, producing a welfare loss associated with greater pollution.