General Equilibrium Trade Model Research Articles

Multinational entry and exit, technology transfer, and international business cycles

I develop a general equilibrium model of trade and horizontal multinational firms with firm heterogeneity and parent-to-affiliate technology transfer to evaluate how multinationals affect international business cycles. When calibrated to match micro and macro features of the United States, the impact of multinational firms crucially depends on the labor supply elasticity and the technology transfer parameter. Surprisingly, with standard (elastic) labor supply, multinationals lead to lower international correlations and higher macroeconomic volatility. A novel mechanism – procyclical exit of multinational firms – drives these results. The results are overturned only when inelastic labor supply and a high level of technology transfer are implemented together. Using novel bilateral data on the number and sales of multinational affiliates, I find evidence that the key model mechanism, i.e., entry and exit by multinationals, increases international output correlation.

The Effects of Roads on Trade and Migration: Evidence from a Planned Capital City

A large body of literature studies how infrastructure facilitates trade. We ask whether infrastructure also facilitates migration. Using a general equilibrium trade model and rich spatial data, we study the impact of a large, plausibly exogenous shock to highways in Brazil on both goods and labor markets. We find the highway system increased welfare by 2.8 percent, of which 76 percent was due to reduced trade costs and 24 percent to reduced migration costs. An implication of costly migration is spatial heterogeneity in benefits: the range of welfare improvement is 1 to 15 percent, as opposed to uniform gains with perfect mobility. (JEL H54, H76, O18, R23, R42, R53)

Tariff Rate Uncertainty and the Structure of Supply Chains

We show that reducing the probability of a trade war promotes long-term importer-exporter relationships that ensure provision of high-quality inputs via incentive premia. Empirically, we introduce a method for distinguishing between these long-term relationships--which the literature has termed "Japanese" due to their introduction by Japanese firms--from spot-market relationships in customs data. We show that the use of "Japanese" relationships varies intuitively across trading partners and products and find that the use of such relationships increases after a reduction in the possibility of a trade war. Extending the standard general equilibrium trade model to encompass potential trade wars and relational contracts, we estimate that eliminating "Japanese" procurement reduces welfare about a third as much as moving to autarky.

Long‐run impacts of the conflict in Ukraine on grain imports and prices in Africa

AbstractRussia's invasion of Ukraine has threatened global grain supplies as it reduces production and exports while increasing trade costs. While the overall share of Africa's trade with Ukraine and Russia is small, the concentration of imports in products such as wheat, other grains, and fertilizer is critical to food security. This paper investigates the long‐term impacts of the conflict on grain imports and prices in Africa. We use a long‐run general equilibrium trade model to study three scenarios that may evolve as a consequence of the conflict: (1) a heavily reduced Ukrainian production of wheat and other grains; (2) rising trade costs with Ukraine and Russia due to disrupted trade routes in the Black Sea and the sanctions against trading with Russia; and (3) an outright ban on Russian grain export. The model simulations show that the conflict severely affects grain imports, raising local prices for wheat and other grains, with especially strong effects in high import‐dependent countries. That creates risks for food security in some African countries.

Brothers in arms: the value of coalitions in sanctions regimes

Abstract This paper examines the impact of coalitions on the economic costs of the 2012 Iran and 2014 Russia sanctions. By estimating and simulating a quantitative general equilibrium trade model under different coalition setups, we (1) dissect welfare losses for sanctions senders and target; (2) compare prospective coalition partners; (3) investigate ‘optimal’ coalitions that maximize payoff from sanctions; (4) provide bounds for sanctions potential, that is, the maximum welfare change attainable when sanctions are scaled vertically up to an embargo, and horizontally up to a global regime. Relative to unilateral action, we find that coalitions magnify welfare losses imposed while their impact on domestic welfare loss incurred depends on the design and sectoral dimension of sanctions. Hypothetical cooperation of large developing economies such as China additionally raises the deterrent force of coalitions. Additionally, we quantify transfers that equalize welfare losses across coalition members to further demonstrate asymmetries in the relative economic burden of sanctions. In all scenarios, we implement a novel Bayesian bootstrap procedure that generates confidence bands for simulation outcomes.

The social footprint of globalisation: towards the introduction of strategic industries in quantitative trade models

ABSTRACT We argue that our understanding of industrial policy in the presence of ‘strategic’ industries that exert positive externalities on the national economy may benefit from an extension of quantitative general equilibrium trade models making the extent and pattern of trade-induced reallocations more salient. To make these features relevant for national welfare, we introduce the notion of the ‘social footprint’ of globalisation as the result of suboptimal trade-induced structural transformation in the presence of externalities. For proof of concept, we use simple workhorse models featuring two countries and two industries (only one of which is ‘strategic’) to highlight the role of the ‘scale elasticity’ of the strategic industry and the consequences of the most common assumptions on market structure in quantitative trade analyses.

Longevity and the value of trade relationships

More than 80 percent of U.S. imports occur in preexisting firm-to-firm relationships, and disruptions to them can have large and long-lasting effects. Using U.S. Census data, this paper shows that as importers and their suppliers transact repeatedly, traded quantities and survival probabilities rise. We develop a general equilibrium trade model with relationship dynamics that is consistent with these facts. The quantification implies that long-term relationships are substantially more valuable to firms than new relationships, with wide variation across source countries. Losing relationship capital is costly for an economy, with disruptions to relationships causing notably lower levels of consumption and trade in the short- to medium term.

Trade decoupling from Russia

We use a general equilibrium trade model to quantify the welfare cost of decoupling from Russia. We find that a doubling of non-tariff barriers imposed by the West on Russian imports and exports of all goods would decrease Russian welfare by 4.8% and would have a relatively small effect on Western welfare. We show that the welfare cost of decoupling is amplified by supply chains and that restrictions on Russian energy, especially oil, matter quantitatively. Finally, we find that welfare losses generated by restrictions actually applied by the West in the aftermath of the 2022 Russian invasion of Ukraine account for around 80% of those obtained in our decoupling scenario.

How unilateral tariffs harm workers under oligopoly

AbstractI study import tariffs in an asymmetric general oligopolistic equilibrium trade model. Their anti‐competitive effect reduces labour demand because firms want to shorten supply. Unilaterally increasing the import tariff raises domestic welfare at the foreign country's expense, but comes at the cost of favouring profit recipients as compared to workers, whose real wages fall. Only if initial tariffs are low, the tariff‐increasing government could use its rising tariff revenue to neutralise the distributional effect or the negative effect on workers. If supporting workers is the policy objective, tariffs do not appear to be a suitable tool under oligopoly.

Geopolitical fragmentation and trade

What are the economic consequences of geopolitical fragmentation on trade? We answer this question by using a canonical general equilibrium trade model to quantify the trade and welfare effects stemming from world trade fragmentation along geopolitical borders. To calibrate the size of the increase in trade costs, we use a new aggregate measure of trade restrictions that spans over the last 70 years and includes up to 157 countries and estimate the impact on trade of very broad trade policy restrictions in a theory-consistent structural gravity framework. We estimate that a fragmentation into three different trade blocs (Western, Eastern, Neutral)—defined according to how countries voted on the suspension of the rights of membership of the Russian Federation in the United Nations Human Rights Council because of the invasion of Ukraine— would have important effects on trade between them, reducing trade flows by 22%–57%, in the most extreme scenarios. Welfare losses would be the largest in the Eastern bloc, where the median country would experience a welfare loss of up to 3.4%.

Trade, policy, and economic development in the digital economy

This paper assesses the impact of internet connectivity and digital trade policies on trade and welfare. Using new measures of internet connectivity, we find a significant positive relationship between internet use, bandwidth capacity, and trade. The positive relationship between internet use and trade is present for international and domestic trade, goods and services, high- and low-income exporters, and at the intensive and extensive margin. We also find that digital trade facilitation provisions in trade agreements have significantly increased trade for high-income exporters, especially for services trade. Informed by these findings, we use a general equilibrium model of trade to assess the trade and welfare impacts of increased internet connectivity and digital trade policies for developing countries. Increasing internet connectivity can have large positive welfare impacts on poorly connected countries, but these results also highlight the dangers of developing countries falling behind if they are not able to improve internet infrastructure. Introducing digital trade provisions into an existing trade agreement between high- and low-income countries can facilitate growth in trade in services for both members.

How Do Productivity Benefits Spill Over Across Firms? Explorations in a Heterogeneous Firm Applied General Equilibrium Trade Model

Considerable diffusion of technology occurs via global trade and foreign direct investment (FDI) while firm heterogeneities cause considerable production heterogeneities. Hi-tech products and investment goods of differentiated varieties from emerging and developed economies are vehicles of superior technology. Given this stylized evidence, we analyse factors facilitating (or inhibiting) technological spillover to domestic firms in the host nations in a counterfactual scenario of a Trans-Pacific-Partnership (TPP) deal. By using a mixture interface of global computable general equi-librium (CGE) models of FDI (GTAP-FDI) and firm heterogeneity model of Global Trade Analysis Project, GTAP Heterogeneous (GTAP-HET), we calibrate impacts of trade and FDI spillovers on: (i) global production, (ii) trade patterns, (iii) welfare and (iv) regional productivity gains. Importance of regional trade agreements and policy for productivity spillovers is highlighted.

Selection effects, inequality, and aggregate gains from trade

This paper argues that the cost of trade-induced inequality in terms of aggregate gains from trade is decreasing with globalization. I use a general equilibrium model of trade and show that at low levels of trade openness, a 1% point increase in real per capita income due to higher trade is associated with percentage point increases of 0.5, 0.85, and 0.92 in the Gini, Atkinson and Theil indices, respectively. These trade-offs, however, quickly decline upon opening up to trade and converge toward zero as trade barriers disappear. I find that at high levels of openness, more firms are exporters such that the elasticity of income inequality to reductions in trade costs converges to a constant, whereas the elasticity of average real income keeps increasing. Trade liberalization has positive marginal welfare effects for a wide range of social welfare function parameters. Existing taxation and redistributive policies can reinforce this relationship.

Multinational Firms and Economic Integration: The Role of Global Uncertainty

This paper develops a three-country, two-sector, two-factor general-equilibrium trade model in which multinational firms’ FDI decisions are influenced by global uncertainty level. We investigate the effects of economic integration under uncertainty, and highlight an important new type of FDI which is certainty-seeking. A numerical general-equilibrium model has been explored to study in depth the endogenous regime changes with six different firm types. Among others, we show that multinational firms are highly influenced by global uncertainty level, so that even the same economic integration process leads to significantly different global market structure.

Cutting through the value chain: the long-run effects of decoupling the East from the West

With ever-increasing political tensions between China and Russia on one side and the EU and the US on the other, it only seems a matter of time until protectionist policies cause a decoupling of global value chains. This paper uses a computable general equilibrium trade model calibrated with the latest version of the GTAP database to simulate the effect of such a decoupling–implemented by doubling non-tariff barriers–between the two blocks on trade and welfare. Imposing import barriers almost completely eliminates bilateral imports. In addition, changes in price levels lead to higher imports and lower exports of the imposing country group from and to the rest of the world. The targeted country group increases exports to the rest of the world and reduces imports. Welfare falls in all countries involved, suggesting that governments should strive to cooperate rather than turn away from each other. By imposing a trade war on Russia, the political West could inflict severe damage on the Russian economy because of the latter’s smaller relative economic size.

Quantifying the impact of Russia–Ukraine crisis on food security and trade pattern: evidence from a structural general equilibrium trade model

PurposeConsidering the importance of Russia and Ukraine in agriculture, the authors quantify the potential impact of the Russia–Ukraine conflict on food output, trade, prices and food security for the world.Design/methodology/approachThe authors mainly use the quantitative and structural multi-country and multi-sector general equilibrium trade model to analyze the potential impacts of the conflict on the global food trade pattern and security.FindingsFirst, the authors found that the conflict would lead to soaring agricultural prices, decreasing trade volume and severe food insecurity especially for countries that rely heavily on grain imports from Ukraine and Russia, such as Egypt and Turkey. Second, major production countries such as the United States and Canada may even benefit from the conflict. Third, restrictions on upstream energy and fertilizer will amplify the negative effects of food insecurity.Originality/valueThis study analyzed the effect of Russia–Ukraine conflict on global food security based on sector linkages and the quantitative general equilibrium trade framework. With a clearer demonstration of the influence about the inherent mechanism based on fewer parameters compared with traditional Global Trade Analysis Project (GTAP) models, the authors showed integrated impacts of the conflict on food output, trade, prices and welfare across sectors and countries.

The impact of Russia-Ukraine conflict on global food security

Ukraine and Russia are two important grain producers and exporters in the world, accounting for 12% and 17% of the world's wheat exports, respectively. The conflict between Russia and Ukraine may greatly impact Ukraine's wheat production and export as well as Russia's wheat export. Satellite observations have showed signs of wheat production reduction in Ukraine in the season 2021–2022. Considering the uncertainty of the conflict duration, we have designed three scenarios (i.e., slight, medium, and severe) depending on how the war would significantly impact the wheat harvest and trade disruption. From analysis of potential impacts of the conflict on global wheat market under the general equilibrium trade model, we have found that the conflict would lead to a trade drop (60%), soaring wheat prices (50%), and severe food insecurity with decreased purchasing power for wheat (above 30%) in the most severe scenario, especially for countries that heavily rely on wheat imports from Ukraine, such as Egypt, Turkey, Mongolia, Georgia, and Azerbaijan. Considering the role of Russia and Ukraine in agricultural input sectors including oil, natural gas, and fertilizers, especially Russia, the trade blockade caused by the conflict will give rise to price increase by 10%–30% and welfare decline by 15–25% for most affected countries. The conflict would put as many as 1.7 billion people in hunger and 276 million people in severe food insecurity. Food shortages, energy shortages and inflation have spread to many countries like dominoes which have fallen into trouble one after another with social unrest day after day. Our analysis also shows that countries including the United States, China, India, Canada, Australia, France, Argentina, and Germany would increase their wheat production and exports for the reconstruction of the global wheat supply pattern. The modeled results indicate that the conflict-induced global wheat crisis and food insecurity can be notably alleviated if these countries increase their production by 2%–3% in 2022–2023 and unnecessary trade restrictions are exempted.

A general equilibrium assessment of COVID-19's labor productivity impacts on china's regional economies.

This study introduces a database for analyzing COVID-19’s impacts on China’s regional economies. This database contains various sectoral and regional economic outcomes at the weekly and monthly level. In the context of a general equilibrium trade model, we first formulate a mathematical representation of the Chinese regional economy and calibrate the model with China’s multi-regional input-output table. We then utilize the monthly provincial and sectoral value-added and national trade series to estimate COVID-19’s province-by-month labor-productivity impacts from February 2020 to September 2020. As a year-on-year comparison, relative to February 2019 levels, we find an average 39.5% decrease in labor productivity (equivalent to around 305 million jobs) and an average 25.9% decrease in welfare. Labor productivity and welfare quickly returned to the recent high-growth trends for China in the latter half of 2020. By September 2020, relative to September 2019, average labor productivity increased by 12.2% (equivalent to around 94 million jobs) and average welfare increased by 8.2%.

An interregional input–output analysis with the Eaton–Kortum model

This study proposes a multi-regional input–output (I–O) model obtained from comparative statics analysis and a linear approximation of Eaton and Kortum's (2002). [Technology, geography, and trade. Econometrica, 70(5), 1741–1779. https://doi.org/10.1111/ecta.2002.70.issue-5] general equilibrium trade model. The derived reduced form, which represents the effect of a final demand shock, is equivalent to the Leontief inverse, which means that our model is a straightforward extension of the conventional I–O framework. In addition, supply-side shocks, such as a decrease in transport costs, and the corresponding welfare gains are also calculated without setting any structural parameters. The linear reduced forms also enable us to decompose the welfare gains into various ripple channels, such as by sector, region, or the time that the gain arrives. A Japanese multi-regional I–O table is used as a numerical example to derive the effect of a reduction in transport costs (for the links around the northern region). The results indicate that more than half of the welfare gains in the southwest region are delivered through indirect channels, and their time to arrival is more than twice of that in the northern region, which is close to the shock.

Demand risk and diversification through international trade

I develop a theory of risk diversification through geography. In a general equilibrium trade model with monopolistic competition and stochastic demand, risk-averse entrepreneurs exploit the spatial correlation of demand across countries to lower the variance of their global sales. The model implies that both the probability of entry and trade flows to a country are increasing in the “Diversification Index”, which depends on the multilateral covariance of the country's demand with all other markets. The risk diversification behavior can lead to higher welfare gains from trade than the ones predicted by trade models with risk neutrality. Using a panel of international sales of Portuguese firms, I estimate “risk-augmented” gravity regressions, which show that the Diversification Index significantly affects trade patterns at the extensive and intensive margins. In general equilibrium, the risk diversification channel increases welfare gains from trade by 17% relative to trade models with risk neutrality.