In this paper, we study the co-movement of the government budget balance and the trade balance at business cycle frequencies. In a sample of 10 OECD countries we find that the correlation of the two time series is negative, but less so in more open economies. Moreover, for the US the cross-correlation function is S-shaped. We show that a standard business cycle model featuring government spending and technology shocks is able to replicate these empirical regularities. The model predicts that, conditional on spending shocks, the correlation of the budget balance and the trade balance is close to perfect, consistent with the twin deficit hypothesis. Despite this high correlation, however, the economic effect of spending shocks on the trade balance is contained if the economies are not very open to trade.