Time-intensive R&D and unbalanced trade

Philip Ulrich Sauré

Issue
2015-11

Pages
35

JEL classification
F12, F41

Keywords
Unbalanced trade, setupcosts, R&D costs

Year
2015

This paper highlights a novel mechanism that generates global imbalances. It develops a general equilibrium trade model with one of two countries having a comparative advantage in a sector whose production is characterized by (i) rapid, anticipated demand growth and (ii) large up-front R&D costs. International funding of the accruing R&D costs generates capital inflows in the R&D stage, which are balanced by subsequent outflows. Importantly, sector-level growth does not generate growth differentials between countries, typically regarded as rationales of global imbalances. Additionally, it is shown that a trade surplus can coincide with appreciations of the real exchange rate. I argue that Switzerland's trades surplus, which was driven to record heights during 2010-2014 by pharmaceutical exports, exemplifies this mechanism. Calibrating the model to Swisstrade flows underpins this argument.