Goods Trade and Capital Investments in the Global Economy

We develop a new theoretical framework for modelling this interaction between goods trade and capital investments. Our framework rationalizes key features of the observed data. We allow for a large number of asymmetric countries connected by a network of trade and capital investments. We provide microfoundations for gravity equations for trade and capital investments. We use our framework to examine the following questions: Are capital investments complements or substitutes for goods trade? How much bigger are the gains from globalization when trade integration is combined with international capital liberalization? How is the impact of China’s economic growth on its East Asian neighbors altered when capital is free to move across borders as well as goods? How much larger are the costs of Brexit for the United Kingdom when capital is free to reallocate internationally? How does this reallocation of capital affect the distributional consequences of trade disintegration? How much greater are the costs of international sanctions for targeting and targeted countries when restrictions on capital investments are combined with barriers to trade in goods? What are the global implications of a decoupling between China and the United States?