Bilateral Import Demand Elasticities and Balanced Trade Protection

Overview & Synopsis

Recognizing that macroeconomic conditions determine aggregate trade imbalances, can tariffs eliminate bilateral trade deficits? The Balanced Trade Tariff Index (BTTI) is introduced as the uniform tariff that closes bilateral deficits while holding macroeconomic conditions fixed. The BTTI depends on bilateral, product-level import demand elasticities estimated using a translog GDP function applied to data from seven major economies. The novel elasticity estimates vary widely across importers, exporters, products, and trade directions. This heterogeneity lowers average implied tariffs relative to homogeneous-elasticity benchmarks, yet implies substantially higher tariffs are required for exporters of inelastic products, underscoring the limits of tariffs for balancing trade.