How Sustainable Are Trade Balances in China, Japan, and Korea?

Previous studies of trade flows have been based on bivariate analysis and residual-based panel cointegration techniques. This paper studies the long-run relationship between exports and imports in China, Japan, and Korea by applying the likelihood -based panel cointegration technique and multivariate analysis. The results indicate that there exists a long-run steady-state relationship between exports and imports. The policy implications of our findings are that trade flows do not lead to the violation of international budget constraints and, more importantly, there is no productivity gap between the domestic economy and the rest of the world. This implies a lack of permanent technological shocks to the domestic economy. The existence of cointegration between imports and exports in the sample countries also suggests that their macroeconomic policies are effective in bringing exports and imports into balance.