US Trade Deficit, a Reality Check: New Evidence Incorporating Asymmetric and Nonlinear Effects of Exchange Rate Dynamics

In the context of the debate on the global imbalances, this study investigates the determinants of US trade balance in a Non-linear ARDL framework which accounts for the asymmetric and nonlinear effects of real exchange rate dynamics. Drawing on the data from 1994Q1 to 2018Q1, our key empirical findings suggest significant evidence of short and long run asymmetries between the real effective exchange rate, US trade balance and its determinants. An asymmetric cumulative dynamic multiplier analysis showed evidence of an asymmetric J-curve. Furthermore, our empirical results showed that price stability, productivity, domestic savings and fiscal discipline are crucial for determining the US trade balance in the short to long term. Empirical findings of this study contribute to the contemporary debate on the US trade deficit and have profound policy implications for the competitiveness of the US economy and its external balance.


Introduction
The "global imbalances" a term often synonymously used for "current account imbalances" are central to the policy debates on the global political and economic forums (Borio, 2016). In this regard, the dynamics of the world's largest economy the US with its gigantic trade volume has significant economic and political implications for the rest of the world. The US trade imbalance with its major trade partners has been a longstanding issue, particularly since the Global Financial Crisis (GFC) 2008-9. Though the downturn of the economy in aftermath of the GFC accompanied some improvements in the US trade balance, further elimination of trade deficit has not been witnessed since then and in fact, there has been deterioration. A prima facie manifestation of US trade balance dynamics is depicted in Fig 1 which shows persistent and widening deficit since the early 1990s. This has caused a heated debate and most recently, a trade war.
Since 2002, the U.S. has experienced twin deficits i.e. a growing budget deficit along with growing trade deficit. A United Nation's report proposed to tackle U.S. massive trade deficit in a cautious process which shall involve a reduction in domestic demand as well increase in demand from its trading partners (see, Hong, 2001). In this context, there is also a misperception that the rise of exports from emerging economies shall be blamed for the widening US deficit in recent years. Therefore, an aggressive approach to solve the trade deficit has been adopted by the new administration. For example, tariffs have been imposed on steel and alumina imported from Canada, Mexico and the European Union and a 25 per cent tariff on $ 200 billion worth of imports from China. The countries running large trade surpluses, particularly Japan, China and Germany have been accused of competitive devaluation, though, similar to the US these countries had been focused on the provision of liquidity to the real economy in the post GFC era which might have led to some depreciation as a by-product of monetary policy actions (Hoffmann, 2013;Briscoe, 2015). Yet, post-global financial crisis, there has been the politicisation of issues around global imbalances, particularly, competitive devaluation and unfair trade distortions (Variar, 2011;Nasir and Jackson, 2019). On this aspect, Čerović et al (2014) argued that the crisis has reignited and fuelled the debate between liberalism versus protectionism and the protectionist measures have been taken to protect national interests. Shelburne (2010) (Narayan, 2006;Lee and Chinn, 2006;Bahmani-Oskooee and Kutan, 2009; Bahmani-Oskooee and Baek 2016; Bahmani-Oskooee and Shah 2017; Bahmani-Oskooee et al 2019). However, with reference to the US, some scholars, for instance, ), Reinhart (2017, Sachs (2017), Eichengreen (2017) and Fratzscher (2017) suggested that it is an imbalance in the investment and saving than the issue of exchange rate manipulation or competitive devaluations.
While to some scholars the trade disequilibria are associated with the financial liberalisation which began in the 1980s (see e.g. Dooley et al., 2003;Caballero et al., 2008;Chakraborty and Dekle, 2009). Steiner (2014) argued that the demand for dollars as a reserve currency has led the US to run a huge current account deficit and resulting global imbalances. Sinn (2017) argued that the appreciation in the UK and US could be associated with their attractive and developed financial sector which attract investments from foreigners and weigh on their export sectors and hence make them run large trade deficits. Whereas, Altuzarra et al (2010) that the trade imbalances are due to structural changes in the current national and international supply and demand patterns, and in fact, the US trade deficit was financed by the capital flows from some of the large oil exporters as well as emerging (surplus) economies (Ito, 2008;Altuzarra et al, 2010). Low international interest rate as a result of the large supply of saving in the Far-East, e.g. China, is responsible for the massive U.S. trade deficits (Bernanke, 2005). Nevertheless, there are a number of other influential factors, for instance, structural changes, trade policy technological progress and/or monetary and fiscal policies (see Saadaoui et al, 2013;Loeffler, 2015;Yue et al, 2016). Reduction in values of money through inflation can also influence trade balance (Hume, 1742, Stockman, 1985. On the other hand, a rise in government spending may encourage more import but less export (Bahmani-Oskooee and Payesteh, 1993). In terms of dealing with trade imbalances, Sinn (2017) suggested that the US and Eurozone should have a welldisciplined fiscal stance. However, these assertations and underlying factors held responsible for trade imbalances as suggested by various studies are required to be tested in the context of the US trade deficit. Therefore, contextualising on the debate on US trade deficit and resulting trade war and capitalising on the studies briefly acknowledged in this para (and next section on determinants of trade balance), the objective of this study is to empirically explore the impact of real exchange rate dynamics and other determinants on US trade balance.
To reiterate, the global imbalances are often exploited for political gains and therefore have significant political implications. Reinhart (2017) argued that since the 1980s, Japan, China and lately Germany have been accused by the US for its trade deficits. Similarly, criticising current US administration stance on Germany and China, Sachs (2017) declared it to be the lack of US savings rather than the unfair trade policy by Germany and China. Similarly, Zhang and Sato argued that Chinese Renminbi should not be blamed for the US deficit. However, earlier studies suggest that the changes in US productivity were the main determinants of the US trade position (Kollmann, 1998) 3 . Putting the political debate aside, one shall look at the empirical evidence to see which are the actual critical factors deriving trade balance in the US. Concomitantly, the main objectives of this study are to contextualise the debate on the US trade balance and look at the effects of the key macroeconomic factors on the US trade balance while accounting for the short long-term differences as well as asymmetries and nonlinearities. In so doing, we employed a Nonlinear Autoregressive Distributed Lag (N-ARDL) model on the US quarterly data from 1994 Q1 to 2018 Q1. This study aims to determine whether the crucial domestic macroeconomic factors such as personal saving, effective real exchange rate, domestic inflation (GDP deflator), fiscal discipline and productivity also influencing the US trade balance and to what extent.
Our key findings suggest significant evidence of short and long-run asymmetries between the exchange rate, US trade balance and its determinants. We found significant evidence of an asymmetric J-curve.
Furthermore, our empirical results showed that the price deflator, productivity, domestic savings and fiscal deficit/discipline are crucial for US trade balance in the short as well as long term. The subject study contributes to the debate on the US trade deficit and has profound policy implications for the competitiveness of the US economy and its external balance.
The rest of the paper is organised as follows. Section 2 briefly reviews the existing evidence on the determinants of the trade balance to contextualise the debate on global imbalances and US trade deficit.
A Nonlinear Autoregressive Distributed Lag (NARDL) model is set out in Section 3. The empirical findings and discussion are found in Section 4. Finally, Section 5 concludes and discuss policy implication.

Determinants of the Trade Balance
In this treatise, the potential determinants of the trade balance we are focusing on are real effective exchange rate, domestic savings, domestic price levels, fiscal discipline/deficit and productivity.
Starting with the exchange rate which is perhaps the most debated determinant of the global imbalances.
For year's exchange rate has been viewed as an effective tool in adjusting trade imbalance. The logic of exchange rate and the trade balance nexus is embedded in the notion that the exchange rate appreciation makes tradeable domestic goods and services more expensive for overseas markets while import goods and services become more affordable and vice versa. If such a scenario prevails, Government interventions, analogous to those made by the US (discussed in the introduction) through tariff may be required to correct the issue. Yet, there is often a delay in the materialisation of exchange rate impact, manifested in the fact that the prices of previous purchase orders or contracts that have already been agreed do not change contemporaneously. A phenomenon known as J-curve where the correction of the trade balance should be observed in the long run 4 . For the adjustment of trade balance through appreciation and depreciation, one can go as far back as Hume's (1742) price-specie flow mechanism argument. The empirical studies since then often support a significant relationship between exchange rate and trade balance (Stučka, 2004;Baharumshah, 2001;Bahmani-Oskooee and Ratha, 2004;Bahmani-Oskooee and Saha, 2017;Nasir and Simpson, 2018 Rose and Yellen (1989) and Rose (1991) or more lately, Wang et al. (2010), Liew et al (2000) and Shahbaz et al. (2012). However, the empirical evidence on such an impact is also mixed and contrasting, for instance, after analysing 87 countries, Bleaney and Tian (2014) reported that the industrial countries are slower in the adjustment of trade balance after a fall of the exchange rate.
There is a notion that the exchange rate flexibility significantly affects the adjustment of trade balance (Ghosh et al., 2013), although the empirical evidence, do not always support the idea that a flexible exchange rate regime would facilitate current account adjustment (Chinn and Wei, 2013). Studies, for instance, Falk (2008) further suggest that the depreciation of effective exchange rate become less efficient in trade balance improvement to countries which have already with trade balance deficit. As it is prima facie evident that the US has a persistent trade deficit, so can the depreciation help? In fact, a recent study Begović and Kreso, (2017) shows small open (European transition) economies may experience an adverse effect of the effective exchange rate on the trade balance. They argued that this is due to the reason that while the depreciation of currency encourages export, small economies that do not have substitutes for imports or unable to increase export capacity will not see the effect of the exchange rate change on the trade balance. However, the wider evidence from developed and developing economies also suggest that it is not always the case the depreciation helps to improve the trade balance (Wang et al., 2010;Liew et al 2000;Rose 1991;and Shahbaz et al., 2012). Employing nonlinear approaches, Arize (2017)  Saving rate increase the supply of loanable funds which leads to a fall of interest rates. This result in an increase in both domestic investment and net capital outflow. Therefore, improving the saving rate may facilitate the elimination of trade imbalance (Arize et al. 2000;Chiu and Sun, 2016). Furthermore, as the export revenue increases, the reliance on foreign capital decreases, resulting in even higher domestic savings. A pattern that found commonly in strong export developing countries (Kandil, 2009).
Ben Bernanke (2005) and  have very strongly argued that the huge saving in East Asia, particularly in China has distorted global interest rate had led to a drastic decline in interest rates in the US. Savers find themselves worse-off after falling of interest rate, on the other hand, capital becomes cheaper to borrow this encourage more inflow of capital to finance import consumption and a low level of domestic saving. Some subsequent empirical studies rendered support to Bernanke's view (for example, Caballero et al., 2008;Mendoza et al., 2009 andSteinberg, 2018). Further, on this channel, Blanchard and Milesi-Ferretti (2011) argued that the export-led countries through macroeconomic policy interventions achieve high saving rate and low domestic demand. This encourages domestic firms to seek export opportunities for expansion. Domestic currency depreciates under low-interest rate making the products more competitive in the global market, trade figure of import countries worse-off.
On the other hand, intuitively, some studies have rather focused on the saving as a domestic issue and argued that the low domestic net savings are blamed to the U.S. massive trade deficits (e.g. Feldstein, 2008;Chinn and Ito, 2008;Laibson and Mollerstrom, 2010). A remarkable study on the global savings glut by Chinn and Ito's (2007)  Fiscal policy is an important tool for the adjustment of the trade balance. Faced with a trade deficit, a contractionary stance would see a reduction in consumption of both imported and domestic goods and services. As the domestic market shrinks, domestic firms focus on foreign markets and successful ventures may lead to improvements in the trade balance. On the other hand, increased public spending drives up wages and prices and reduce personal saving. Imports increase after increase in income and leading to an increase in the budget deficit. An undesirable potential outcome of the budget deficit is that fall in public saving below domestic investment implies more money to be borrowed from aboard.
The empirical evidence shows that government budgetary stance plays a significant role in inflicting current account balance (Baxter, 1995) i.e. Twin Deficits Hypothesis. A twin deficit that U.S. experience since the early 2000s where it has seen an increasing budget deficit and deterioration in trade balance (Cavallo, 2005;Corsetti and Mὔller, 2006). There had been concerns raised the expansionary fiscal policy employed by U.S. administration would worsen what had been already a wide trade deficit in the Pre Global Financial Crisis era (Chinn, 2005). These concern were disagreed by Ferguson (2004); Greenspan (2005a, b) arguing that at least in short-run, the twin deficit does not exist (also see, Kim and Roubini (2004). Denying the twin deficit, it is argued that an increase of budget deficit, private saving increases expecting a future tax increase, increase government borrowing push up interest rate decrease demand of imports, current account improves. On this aspect, Erceg, et al., (2005) found low responsiveness of prices and switching cost between domestic and imported goods have eliminated the effects of budget deficit on the trade deficit. However, with the benefit hindsight, this seems not the case, the US trade deficit reached a record all-time in 2006. Nonetheless, some of the studies, for instance, Bernheim (1988), Chinn and Prasad (2003) and Chinn and Ito (2008) argued that the budget deficit partly contributes to the massive trade deficit. In this regard evidence from EU countries, Beetsma et al (2008) also reported significant dual deficit hypothesis in EU economies as their North American counterpart. Hence, it is cogent to include the budget deficit into our analysis to see how much it contributes to the US trade deficit.
The domestic price levels are important factors in determining the price competitiveness of open economies. This aspect was at forefront of the Hume's (1942) argument that the increased supply of the gold (accumulated through trade surplus) will lead to increase in the domestic prices which will discourage exports and encourage imports and in so doing will lead to adjust of the trade balance.
Concomitantly, inflation can have dramatic effects on the direction as well as the volume of international trade (Stockman, 1985). In specific to the trade deficits EMU peripheral states, Sinn (2014) argued that the high rates of domestic inflation had deteriorated the competitiveness of these economies which led to high trade deficits. However, the evidence is contrasting as a recent study by Yiheyis and Musila (2018) reported a very little effect of inflation on the trade balance. Hence, in this study, we are considering the impact of domestic inflation (GDP deflator) on US trade balance to see if the cause of huge trade deficit is due to increase in domestic price levels which may erode the international competitiveness of US economy.
Improved productivity shall play a role in determining trade balance. Ghosh et al., (2014) suggested that the dynamic relationship between productivity and trade balance may offer an alternative tool to adjust trade deficit to countries with less flexible or fixed exchange rate regime. A study by Bussière et al (2010) reported that the productivity and budget deficit are key determinants of current account balances in OECD countries, though there are country-wise differences. Batra and Beladi (1999) argued that the exporting countries which have a large manufacturing base are able to absorb new inventions and materialise them into production. This leads to high productivity and can explain the trade balance.
However, this line of reasoning explaining nexus between productivity and trade balance is at odds with some of the examples in the real world, for instance, it does not explain the impressive trade surplus that China currently enjoys which as compared to the US has unimpressive productivity. As the neoclassical growth model suggests, productivity growth affects both investment and consumption and overarchingly aggregate output. The demand for foreign goods and services increases as the wealth increase. This puts pressure on the trade balance. However, the results may vary among countries depending on various factors, for example, productivity in trade and non-tradeable sectors and/or homebias. On this aspect, some empirical studies support the notion that there is a negative link between productivity and trade deficit (Engel and Rogers, 2006;Chen et al., 2009). Kollmann (1998) focusing on the US and G-6 argued that US productivity shocks were the most dominating factor for the US trade balance. In a later study, Ferrero (2010) argued that productivity growth differentials significantly influence the US trade balance and all of its dynamics. Specifically, the attractiveness of the US for foreign resources and increased consumption leads to the trade deficit. However, it was also argued that as the consumption is decreased and savings are increased to repay the foreign liabilities, the trade deficit decreases. This fuel the rationale for the subject study where we are intending to analyse the implication of productivity, savings as well as the exchange rate, domestic inflation and fiscal discipline for the US trade balance in a framework which accounts for the potential nonlinearities and asymmetries.

Methodology
A Nonlinear Auto-Regressive Distributed Lag (N-ARDL) framework is employed to estimate and analyse the shocks to the US trade balance caused by its potential determinants, namely real effective exchange rate, saving, budget deficit/surplus, productivity and GDP deflator. The novelty of this framework is that it takes into account the asymmetries and non-linearities in the relationship between the explanatory and response variables. furthermore, it provides insight into the long as well as the short-run relationship among the variables of interest (Bahmani-Oskooee and Nasir, 2019). This relationship can be specified in the following form: Where the Trade Balance (TB) is determined by its past values (persistence element, − ), determinants i.e. Real Exchange rates ( ), Price Deflator (PD) a proxy for domestic inflation and price stability, Savings (SAV) , Budget Deficit/Surplus (BUD) for fiscal discipline and Productivity ( ).
Given that these factors are theoretically perceived to be the crucial determinants of external balance.
To reiterate, the novelty of the employed N-ARDL approach is that it takes into account the asymmetries and nonlinearities in the association between trade balance and it's their determinants. As we are interested in investigating these asymmetries and nonlinearities in the context of US trade balance, N-ARDL is the logically appropriate framework of analysis. The N-ARDL Cointegration approach is based on the seminal work by Shin et al (2011) which found its roots in the contributions by Pesaran and Shin (1999) and Pesaran et al. (2001). To start with, we can specify the Eq. 1 in the following longrun model of the Trade balance: Where is trade balance and its determinants are as specified earlier in the Eq. 1, however, = ( 0 − 6 ) is a co-integrating vector of long-run parameters. In Eq. 3 and Eq. 4) the + and − are partial sums of positive and negative changes in the Exchange rate ( ) and, it can be specified as: and In the light formulation presented above (Eq.2), the relationship between Trade Balance ( ) and Exchange Rate ( ) is expected to be negative ( 1 ). However, 2 captures the association between trade balance and exchange rate while there is reductions or depreciation in the real effective exchange rate. Due to negative association estimates of 2 are expected to have positive signs.
Furthermore, we also posit that the exchange rate fluctuations have effects with some lags and follow J-curve behaviour. Nonetheless in the case of asymmetric association between exchange rate and trade balance the effects of appreciation would be different in magnitude from the depreciation. In simple words, the positive shocks will have a greater or smaller impact than the negative shocks i.e. 1 ≠ 2 .
Concomitantly, the long-run relationship presented in the Eq. 2 is expected to reflect an asymmetric exchange rate pass-through. At this juncture, we can frame the Eq. 2 and Eq.3 into a NARDL setting (see, Shin et al. (2011) Pesaran andShin (1999) and Pesaran et al. (2001) as follows: Where we have defined all the variables earlier and , q, s, v, w & are lag orders and 1 = − 2 / 1 2 = − 3 / 1 are the earlier mentioned long-run impacts of increase(appreciation)/decrease(depreciation) in the exchange rate on trade balance (Eq. 5). In Eq. 5, the ∑ + =0 measures the short-run impacts of an increase in the exchange rate on the trade balance whereas ∑ − =0 measures the short-run impacts of a decrease in the exchange rate on the trade balance.
Concomitantly, in this setting, we capture the asymmetric long-run as well as the asymmetric short-run relationship between trade balance and exchange rate dynamics. The implementation of the employed NARDL framework will be entailed on the following steps. At first, we will perform the unit root test to determine the order integration of underlying data series. It is worth acknowledging that the ARDL approach to cointegration is valid whether the series are (0) or (1), however, it is still important to perform to unit root test to confirm that there is no (2) variable. This is an important aspect to consider as (2) invalidates the computation of F-statistics to test the cointegration (Ibrahim, 2015). We would perform the ADF unit root test with a structural break to find the order of integration. Thereafter we would estimate Eq. 5 using the OLS method. After estimation of our NARDL model, we would be applying the bounds testing approach proposed by Pesaran et al. (2001) and Shin et al. (2011) to test cointegration among underlying data series. In so doing, we would perform the Wald F-test with the null hypothesis, 1 = 2 = 3 = 4 = 5 = 6 = 7 = 0. In the last and final step of the analysis, we would examine the long and short-run asymmetries in the relationship between Trade balance and exchange rate dynamics, we would also discuss the impact of other explanatory variables in the model.
With specific to the US Trade balance and exchange rate, we would derive the asymmetric cumulative dynamic multiplier effects of a 1% change in the exchange rate i.e. , ℎ = 0,1,2 … … . ..

Dataset
The employed NARDL framework on the quarterly data from 1994: Q1 to 2018: Q1. The choice of time horizon is informed by the viability of data, particularly on the real effective exchange rate measure. The details of each variable and proxy are attached as Appendix "A".

Analysis & Findings
Prior to estimation, a unit root test is performed to determine the order of integration of underlying data series. For this purpose, the ADF unit root test with the structural break is employed. Accounting for the structural break is vital to avoid the risk of bias towards null of random walk (see Perron (1989) Hansen, (2001) and Perron (2006) Ranganathan and Ananthakumar (2010). We let the data speak and instead of exogenously determining the date of the break, it was left to be determined endogenously.
In so doing, we choose the alternative minimise and maximise options to allow for evaluation of onesided alternatives, this produces different critical values for the final Dickey-Fuller test statistic and tests with greater power than the non-directional alternatives 5 . The ADF is applied to test for the unit root in the presence of break with both Innovative Outliers (IO) and Additive Outliers (AO) 6 . To choose the optimal number of lags for the ADF test, we used the Schwarz Information Criteria (SIC) which is particularly appropriate in the presence of structural break (Asghar and Abid, 2007). The results are presented in Table 1 as follows: The results unit root test with structural break and including innovation and additive outliers presented above suggest that for some of the series (trade balance and real effective exchange rate) the null of no unit root could not be rejected at a statistical level of significance. Although, budget deficit/surplus was found to be stationary at the level indicating the long-term economic and budgetary stability of the United States. However at the first difference, all the serious were found to be stationary i.e. I (1). For the structural break in the US Trade balance, we examined the Dickey-Fuller t-stats and the Dickey-Fuller Autoregressive coefficients for US Trade balance series using Additive and innovation outliers.
The results indicated the presence of a structural break around the global financial crisis (GFC) 7 . This is intuitive if we consider the major disruption for international trade due to the GFC 2007-08. After unit root testing, we come to the estimation of N-ARDL model (Eq. 5). 5 For a detailed discussion and support of this practise please see, Banerjee et al., (1992), Vogelsang and Perron (1998) and Zivot and Andrews (1992). 6 See Fox (1972) and Tsay (1988) for a detailed discussion and classification of "Additive Outliers (AO)" and "Innovative Outliers (IO)". 7 Results are concealed conserve the space but can be provided upon request. Table 2 presents the results of Bounds testing for the nonlinear Cointegration:- The bound testing showed that the critical values of the F-statistics were greater than upper bound at 95% level of confidence. In fact, the results were even significant at 99% indicating strong evidence of Cointegration in the model models (Eq. 5), although, in line with the common practice, our benchmark is 95%. This implied that there is a long-run relationship between the under analysis variables and hence, we can proceed with the estimation and further analysis. The results of Nonlinear ARDL are presented in Table 3:  suggesting the short-terms asymmetries and nonlinearities. The price deflator had a contemporaneous negative effect, though they were not very significant and varied with lags. Interestingly, the productivity showed short-term positive effects on the trade balance which were also highly significant.

Bound testing for Nonlinear Co-integration
This implied that the productivity improvements can lead to short-term trade balance improvements.
The savings and budget surplus/deficit showed short term negative but insignificant effects on the trade balance. The Error Correction Term (ECT) is found to be negative (-0.192) and high significant suggesting the stability of the model and pace of adjustment. The long-run estimates of our NARDL model presented in the Panel (B) suggest that the positive exchange rate shocks or appreciation ( + ) has strong negative and highly significant effects on the trade balance. On the other hand the negative shocks or depreciation ( − ) had also a negative but insignificant impact. This indicates the asymmetry the nexus between exchange rate trade balances but also suggests that the long-run improvements of trade balance may not be possible by mere exchange rate depreciation. The price deflator showed a very strong negative and significant impact on the trade balance which implied that the inflation significantly reduces the competitiveness of the US economy and worsens the trade balance. The productivity also showed a negative and significant impact on the trade balance in the long run, this implies that the increase in the productivity which may lead to higher income increase the demand for the foreign goods and hence, reduces the US trade balance in the long run.   IV  I  II  III IV  I  II  III IV  I  II  III IV  I   2014  2015  2016  2017  2018 LNBOARDEXCHANGE +1% LNBOARDEXCHANGE -1% Difference The N-ARDL multiplier effects of real effective exchange rate dynamics for the US trade balance showed very interesting results. The positive shock to the real effective exchange rate or an appreciation of US$ (1%) showed initial improvement but then consistent deterioration of the trade balance. This is clear evidence of the J-curve behaviour, in case of an increase or appreciation of US$. However, the negative shock to the real effective exchange rate led to a consistently positive response from the trade balance, implying that the depreciation of the US$ leads to improvement in the US trade balance. But it is also worth noting that the impact of exchange rate shocks is not symmetric as the positive and negative shocks transmit differently. Collectively, there is prima facie evidence of an Asymmetric Jcurve behaviour of the trade balance in response to the real effective exchange rate dynamics.

Conclusion
The global trade imbalances is a topic which never lost its significance in international economics and political economy. This holds true today where the world largest economy is also the largest deficit nation. Concomitantly, it has led to a heated debate and calls for the "trade wars" and accusations of competitive devaluations. However, the impact macroeconomics factors which influence the trade balance adjustment is complicated and interrelated. Keeping this debate in context, we investigated the determinants of US trade balance in a framework which does account for the asymmetric and nonlinear effects of exchange rate dynamics for the US trade balance. Our empirical findings and facts on the ground lead us to conclude that there is significant evidence of short and long-run asymmetries between the exchange rate, US trade balance and its determinants. We found the evidence of an asymmetric Jcurve. The depreciation can be beneficial to the US trade balance which implies that it is the US trade deficit is related to the exchange rate pass-through to which the US has more influence. Furthermore, our empirical results lead us to conclude that the domestic inflation (GDP deflator), productivity, domestic savings and fiscal discipline are crucial for US trade balance in the short to long term.
Specifically, domestic inflation (GDP deflator) and price stability is an important factor which erodes the US international competitiveness trade balance. There could be some short-term gains through improvements in the productivity, however, in the long run, it also leads to negative effects which are in line with the literature. The fiscal discipline and private savings are also found to be important factors which can facilitate the correction of the US trade deficit. The findings of this study contribute to the debate on the US trade deficit and have profound policy implications for the competitiveness of the US economy and its external balance. Specifically, it shows that the trade balance improvement is cannot be attributed to one single macroeconomics factors. Stabilization policies which can facilitate an increase in savings, fiscal discipline, and domestic price stability can act as critical facilitators within a plan of correcting US trade imbalance over the long run. Such a stabilisation should be gradual as sharp stance can have unattended consequences for the global economy. Putting the politics of trade wars aside, the policymakers should be aware of the inter-relationship between these factors and their individual and collective impact on the trade balance.