Challenges to the trade system: The potential impact of changes in future trade policy

Abstract

Abstract Current tensions in global trade policy raise the question which direction global trade will take in the future. In this paper a dynamic computable general equilibrium (CGE) model is employed to explore the impact on the global economy of five scenarios for future trade policy: passive isolation of the US; active isolation of the US; a global trade war; a breakdown of trade cooperation; and a revival of multilateralism. The simulations show that future trade policy could have important consequences for global trade: for the importance of different regions in the global economy; for the growth of global trade; for real incomes in different regions; and for the organization of global value chains. The simulations indicate that the US share in global trade would fall moderately under passive and active isolation and considerably under the trade war scenarios. The share of manufacturing in GDP is hardly affected by trade policy and mainly driven by structural change. Real in- come in the US would fall in most scenarios, whereas China would suffer substantially from a global trade war and the EU heavily from a breakdown of trade cooperation. The trade-to-income elasticity varies from more than 1.3 under a revival of multilateralism to 0.5 under a breakdown of international cooperation. Value chains are projected to shift away from the US towards other regions in the isolation scenarios.