World Trade Model Research Articles

Regions may share factors of production, too: Implementation of topologies within the World Trade Model

ABSTRACT The World Trade Model (WTM), which incorporates input - output data and minimizes global factor costs subject to satisfying demands while being constrained by each region's factor endowments, is one of models based on the principle of comparative advantage. These factor endowments are not necessarily fixed in each region as traditionally posed in most theories, but rather can or de facto be shared across regions. We highlight the importance of this feature for economic modeling, and then introduce an extension for the integration of topological rules into WTM to facilitate the sharing of factors with directionality (one-way or two-way) across regions. A series of numerical examples illustrating a range of sharing scenarios is demonstrated to facilitate an examination of this extension's features. Finally, we discuss the most interesting cases in which this topology can be used, as well as the additional challenges or implementations that can be derived from this work.

Testing competing world trade models against the facts of world trade

We carry out an indirect inference test of two versions of a computable general equilibrium (CGE) model of world trade. One of these, the ‘classical’ model, is well-known as the Heckscher-Ohlin-Samuelson model of world trade, in which countries trade homogeneous products in world markets and produce according to their comparative advantage as determined by their resource endowments. The other, the ‘gravity’ model, assumes products are differentiated by geographical origin, so that trade is determined largely by demand and relative prices differing according to distance; trade in turn affects productivity through technology transfer. These two CGE models of world trade behave in very different ways and predict quite different effects for trade policy, underlining the importance of discovering which best fits the facts of international trade. Our findings here are that the classical model fits these facts fairly well in general, while the gravity model is largely strongly rejected by them.

The cost of war: Impact of sanctions on Russia following the invasion of Ukraine

We use a computable general equilibrium model of world trade to quantify the possible impact of economic sanctions imposed by Western and other countries in response to Russia’s invasion of Ukraine. If sender countries chose 100 % import tariffs and export taxes on trade with Russia, Russia’s GDP would decline by 3–7 % due to the resulting significant reduction in exports. By contrast, the GDP loss for those countries would be 0.2 % for the European economies, but only about 0.05 % for Japan. Although unlikely, the effect of China’s participation in the sanctions would be more significant than that of India. There are concerns about food and energy crises due to economic sanctions against Russia, but the effect on food supplies would not be a serious problem for either senders or third parties. The impact on energy supplies would affect all senders to some extent; for example, there would be a 3% reduction of energy consumption and a 3–4 % rise in electricity and town gas prices in Japan.

Developing the Food, Water, and Energy Nexus for Food and Energy Scenarios with the World Trade Model

The food, energy, and water (FEW) nexus has gained increased attention, resulting in numerous studies on management approaches. Themes of resource use, and their subsequent scarcity and economic rents, which are within the application domain of the World Trade Model, are ripe for study, with the continuing development of forward- and backward-facing economic data. Scenarios of future food and energy demand, relating to supply chains, as well as direct and indirect resource uses, are modelled in this paper. While it is possible to generate a substantial number of economic and environmental scenarios, our focus is on the development of an overarching approach involving a range of scenarios. We intend to establish a benchmark of possibilities in the context of the debates surrounding the Paris Climate Agreement (COP21) and the Green New Deal. Our approach draws heavily from the existing literature on international agreements and targets, notably that of COP21, whose application we associate with the Shared Socioeconomic Pathway (SSP). Relevant factor uses and scarcity rent increases are found and localized, e.g., on the optimal qualities of water, minerals, and land. A clear policy implication is that, in all scenarios, processes of energy transition, raw material use reduction, and recycling must be strengthened.

Theoretical and Empirical Characterization of Water as a Factor: Examples and Related Issues with the World Trade Model

This article originates from the theoretical and empirical characterization of factors in the World Trade Model (WTM). It first illustrates the usefulness of this type of model for water research to address policy questions related to virtual water trade, water constraints and water scarcity. It also illustrates the importance of certain key decisions regarding the heterogeneity of water and its relation to the technologies being employed and the prices obtained. With regard to WTM, the global economic input–output model in which multiple technologies can produce a “homogeneous output”, it was recently shown that two different mechanisms should be distinguished by which multiple technologies can arise, i.e., from “technology-specific” or from “shared” factors, which implies a mechanism-specific set of prices, quantities and rents. We discuss and extend these characterizations, notably in relation to the real-world characterization of water as a factor (for which we use the terms technology specific, fully shared and “mixed”). We propose that the presence of these separate mechanisms results in the models being sensitive to relatively small variations in specific numerical values. To address this sensitivity, we suggest a specific role for specific (sub)models or key choices to counter unrealistic model outcomes. To support our proposal we present a selection of simulations for aggregated world regions, and show how key results concerning quantities, prices and rents can be subject to considerable change depending on the precise definitions of resource endowments and the technology-specificity of the factors. For instance, depending on the adopted water heterogeneity level, outcomes can vary from relatively low-cost solutions to higher cost ones and can even reach infeasibility. In the main model discussed here (WTM) factor prices are exogenous, which also contributes to the overall numerical sensitivity of the model. All this affects to a large extent our interpretation of the water challenges, which preferably need to be assessed in integrated frameworks, to account for the main socioeconomic variables, technologies and resources.

Fighting carbon leakage through consumption-based carbon emissions policies: Empirical analysis based on the World Trade Model with Bilateral Trades

Policy initiatives towards reduction of CO2 emissions implemented so far are grounded on the so-called Production-Based paradigm: this approach allocates responsibility of emissions to countries that directly caused such emissions, without taking into account all the indirect contributions to CO2 emissions caused outside country’s borders, eventually leading to the so-called carbon leakage phenomenon. In this paper, the alternative Consumption-Based approach is proposed, and its effectiveness assessed: according to this approach, policy initiatives allocates responsibility for CO2 emissions proportionally to the CO2 emissions embedded in goods and services required by industries as inputs for production. Global environmental and economic consequences of carbon emissions reduction policies, applied at the European level based on both Production- and Consumption-Based paradigms, are comparatively assessed based on the World Trade Model with Bilateral Trades. Results of this study suggest that defining CO2 emissions policies based on a Consumption-Based paradigm seems to be the most effective way to reduce the global carbon emissions, avoiding the carbon leakage phenomenon which may occur in economies regulated by Production-Based policies. Indeed, an imposed reduction in CO2 emissions embedded in EU final demand through a Consumption-Based Accounting policy would result in a global CO2 emissions reduction up to almost 1.2 Gton. On the other hand, an imposed reduction in direct EU CO2 emissions according to a PBA approach would result in an overall increase in global carbon emissions up to almost 0.8 Gton.

The Impact of Nontariff Trade Policy of European Union Crude Palm Oil Import on Indonesia, Malaysia, and the Rest of the World Economy: An Analysis in GTAP Framework

Indonesia and Malaysia are the largest producers and exporters of palm oil in the world vegetable oil market. Palm oil and its derivative products are the highest contributors to foreign exchange in 2018. This study aims to analyze the impact of the European Union import non-tariff trade policies on the Indonesian and Malaysian economies The analysis uses the Computable General Equilibrium (CGE) model of world trade on the Global Trade Analysis Project (GTAP) program. The results of this study found that the non-tariff import policy by the European Union had a negative impact on the economies of Indonesia and Malaysia. Moreover, the policy also has a negative impact on countries in Southeast Asia and the European Union. This shows that the enactment of non-tariff import trade policies for Indonesian and Malaysian palm oil products has a global impact.

Analysis of export and import structures using network methods (on the example of the agricultural market)

Analysis of trade cooperation between countries and identification of the most significant market participants is of great importance, both theoretically and empirically. The global trading community forms a network of international relations defined by trade contracts in various industries. Export-import trade flows are one of the key indicators of the level of cooperation among countries and the state of the global economy. The high intensity of such contacts across groups of countries suggests the existence of clusters in this market segment,consisting of central players — exporters and importers, who often define rules for other participants.Understanding the existence and identification of such a center helps to develop an optimal international trade strategy. The purpose of this contribution is to identify factors affecting trade flows among different countries. Statistical analysis of the international trade relations does not always reveal all the essential aspects of cooperation. This paper combines the methods of graph theory and econometric analysis to study the parameters of trade flows among countries. The parameters used in the network analysis make it possible to obtain additional characteristics of market participants, which help to evaluate their significance in the world trade. The paper also identifies some key mathematical and economic characteristics of export-import flows connecting destination countries. We have analyzed the directions of changes in world trade and established correspondences between metric characteristics of graph vertices and parameters of world trade models. The Russian indicators in export/import categories and its largest sales agents are estimated. The identification of the key intermediaries and importers (centers and authorities) on each of the markets in question has been carried out. As an example for this identification the market of agricultural products among the world’s largest exporters and importers of the product were used.

Russia in world trade: Between globalism and regionalism

The article examines Russia’s participation in world trade and trade policy, using trade data for 1996–2017 and simulations of a numerical world trade model where Russia is divided into domestic regions. Since the mid-1990s, Russia’s foreign trade has grown much faster than the world average. This was accompanied by rapid deterioration in the trade balance for manufacturing, and fast redirection of imports, with more from China and relatively less from others, especially Eastern Europe. Only 1/8 of Russia’s foreign trade in 2017 was with Eastern Europe. This is why Russia can gain more from trade integration with the world beyond Eastern Europe, according to the model simulation analysis. For Russian domestic regions, multilateral liberalization among all countries has a similar effect across all of them, with a welfare gain due to lower import prices. For the commodity-exporting regions of Russia, preferential free trade agreements (FTAs) have a similar impact. For the more industrialized Russian regions, on the other hand, FTAs lead to manufacturing growth, rising wages and higher prices, and a larger welfare gain. According to the model simulations, trade integration promotes industrial diversification, with manufacturing growth also in some commodity regions. The results indicate that external liberalization is particularly important for the central parts of Russia; with Volga and West Siberia generally obtaining the strongest manufacturing boost from trade integration.

Testing the SDG targets on water and sanitation using the world trade model with a waste, wastewater, and recycling framework

In this article, we employ an extended world trade model and rectangular choice of technology (WTM/RCOT) framework, which minimizes global factor costs subject to satisfying final demand and respecting region-specific factor constraints, to calculate the economic costs of achieving the United Nations Sustainable Development Goals (SDGs) for water and sanitation. We estimate how achieving these goals will affect factor use, trade balances, scarcity rents, and production in 19 regions of the world, drawing on an expanded database developed from the GTAP9 database, the developed model involves 64 technology columns and 74 rows of factors of production. On a theoretical level, this model contributes to the existing literature on the topic by using endogenous cost estimates that consider shifts in production and factor scarcity rents and by considering recycling and wastes within an input-output model, in which wastes can be modelled as input resources as well as waste outputs. We find that the additional factor costs of meeting the water and sanitation targets of the SDGs exceed US$100 billion annually, with a total cost of US$3.3 trillion from 2015 to 2030. These figures are similar to other recent works on the subject despite methodological differences. It also suggests that the worldwide SDG targets can be achieved with moderate costs relative to the total global GDP, especially in comparison to the high estimated cost of inaction. Predictably, in areas working toward water and sanitation SDGs (areas such as Sub-Saharan Africa, regions in South Asia, etc.), factor use costs increase, but not commensurately with the growth of coverage—some regions, such as areas of South America, notably have higher factor use costs along in proportion to the coverage. Indeed, Sub-Saharan Africa, which needs the highest increase in coverage, will not likely have as large increases in factor uses and would barely get scarcity rents. In general, regions with higher SDG targets will require further trade, especially additional imports of inputs such as chemicals and energy products. This trade will increase factor earnings in factor rich regions such as the European Union, Japan, and Korea.

Revisiting the Euro’s Trade Cost and Welfare Effects

AbstractWhen, about twenty years ago, the Euro was created, one objective was to facilitate intra-European trade by reducing transaction costs. Has the Euro delivered? Using sectoral trade data from 1995 to 2014 and applying structural gravity modeling, we conduct anex postevaluation of the European Monetary Union (EMU). In aggregate data, we find a significant average trade effect for goods of almost 8 percent, but a much smaller effect for services trade. Digging deeper, we detect substantial heterogeneity between sectors, as well as between and within country-pairs. Singling out Germany, and embedding the estimation results into a quantitative general equilibrium model of world trade, we find that EMU has increased real incomes in all EMU countries, albeit at different rates. E. g. incomes have increased by 0.3, 0.6, and 2.1 percent in Italy, Germany, and Luxembourg, respectively.

The global economic costs of substituting dietary protein from fish with meat, grains and legumes, and dairy

AbstractThis paper estimates the costs to replace fish by protein from meat, from grains and legumes, or from dairy products. We apply the World Trade Model, an input–output model of the interactions among major world regions based on comparative advantage, to analyze alternative scenarios about protein content and sources in global diets. We find that the substitution of fish by meat or dairy entails several trillion U.S. dollars of additional costs annually, corresponding to increased use of pastureland, cropland, water, and other factors of production. The price of animal products increases steeply as higher‐cost producers need to come online, yielding rents to owners of scarce resources. By contrast, the global economy adjusts at significantly lower costs to the substitution of fish by grains and legumes, but this dietary shift involves substantial modification in the mix of agricultural output and its geographic distribution. There have been few analytic studies able to associate costs and prices directly with specific combinations of dietary options. We provide a flexible economic framework for analyzing alternative scenarios about the present and future production of food. The focus on the provision of protein for the human diet, allowing for substitutions between land‐based and aquatic sources, lays the groundwork for subsequent closer examinations of the potential future contribution of aquaculture and, in a yet broader framework, the impact of the coming generation of large dams on fish habitat and freshwater ecosystems more generally.

Current account balances, exchange rates, and fundamental properties of Walrasian CGE world models: A pedagogical exposition

This paper addresses theoretical aspects of global multinational trade models of the computable general equilibrium (CGE) type. We define and discuss the concepts of model homogeneity, model closure rules, and consistency in calibration. We examine and illustrate these issues using a highly simplified skeleton model derived from the PEP-w-1 CGE world model, to represent the essential structure of world trade models. Model closure issues, including how to correctly fix current account balances, are scrutinized. We also consider the role of nominal exchange rates in Walrasian “real” CGE models (without money), which can be, and often are written without exchange rates. But when exchange rates are present, we show that a model can be solved equivalently by exogenously fixing either exchange rates (FE) or regional price indexes (FP), and we weigh the advantages of either closure for economic interpretation of simulation results. The model is implemented in GAMS and is made available to readers as a supplementary download.

Physical, technical, and economic accessibility of resources and reserves need to be distinguished by grade: Application to the case of phosphorus

The amount of phosphorus in the total environment is finite, yet recent estimates suggest that more than enough phosphate ore resources exist in the lithosphere to meet future increases in demand during the next century. Still, it remains unclear how the accessibility of this resource stock – which is heterogeneous in terms of grade and location – will change as currently accessible resources are utilized, as extraction and processing technologies develop, and as the relative economic costs vary. This study uses an economic framework, the World Trade Model with Rectangular Choice-of-Technology, to link estimates of known geological resources of various grades with the technically and economically accessible reserves. Using the most recent public data on phosphate ore stocks and mining and technological capacity, this study estimates that the ~400,000teragrams (Tg) of known apatite ore (>1% P2O5 content) equate to ~110,000Tg when converted to potential reserves (~30% P2O5) using existing technologies, with over half of these remaining potential reserves converted from resources with grades below 20% P2O5. Corresponding global reserves are estimated at ~70,000Tg using the Rectangular Choice-of-Technology model, but since any reserve estimate is contingent on the state of the world economy, a set of five illustrative scenarios are constructed to show how this estimate can vary between ~67,000 and ~98,000Tg with only a small number of changes to the economic and technical parameters and variables. Calculating accessibility using consistent definitions for resources and reserves while distinguishing between grades not only creates a clearer picture of remaining non-renewable resources, but creates a framework that can be used to explore future geopolitical scenarios about ore availability, extraction technologies, supply networks, and global commodity prices.

The global economic costs of the need to treat polluted water

ABSTRACTWe estimate the global costs and other implications of the need to treat wastewater before it can be re-used. We extend the World Trade Model by creating water treatment sectors and provide alternative sources of water for satisfying users’ quantity and quality requirements. The database distinguishes qualities and quantities of water endowments, sectoral water requirements, and wastewater discharges. We estimate that global water treatment costs could be reduced by several trillion dollars if water endowments were maintained at higher quality than currently is the case. Under scenarios where water quality degrades further, the treatment costs more than double even without taking account of likely increases in quality requirements. This modeling framework provides a starting point not only for more detailed empirical investigations of water management strategies, but also for examining prospects and associated costs for recovering other resources, such as metals, which can be reused multiple times.

CGE Model Closures in a Skeleton World Model

This paper deals with closure issues that arise in the context of global multinational models, typically, trade models. We also explore a few related issues: model homogeneity, the role of exchange rates, calibration consistency, and testing for calibration consistency and model homogeneity. To examine and illustrate these issues, we develop a highly simplified skeleton model derived from the PEP-w-1 worldwide CGE model, which represents the essential structure of several world trade models. After the basic concepts have been defined, the first statement of the model explicits all theoretical relationships. The model is then simplified, and redundant equations are identified and deleted. Next, the role of exchange rates is clarified, and the model is re-written in terms of the international currency, without exchange rate variables. Closure rules are discussed. Finally, exchange rates are re-introduced, and closure rules are revisited, detailing the choice between fixed exchange rates (FE) or fixed regional price (FP) closures; and calibration consistency is discussed. The final version of the model is implemented in GAMS.

Combining Multiregional Input‐Output Analysis with a World Trade Model for Evaluating Scenarios for Sustainable Use of Global Resources, Part I: Conceptual Framework

SummaryConsumption in a particular country often entails resource extraction, production, and environmental degradation in remote locations. This fact has stimulated a growing body of empirical analysis using input‐output (I‐O) databases and techniques to reveal and quantify the underlying linkages. Two lines of research rooted in I‐O economics, multiregional input‐output (MRIO) analysis and I‐O modeling of the world economy, describe and analyze these relationships, the first for the past, increasingly in the form of footprints and the underlying pathways, and the latter under alternative scenarios about possible courses of action in the future. The article shows how organizing such scenario outcomes into an MRIO database can extend the reach of MRIO analysis to the future while simultaneously supplementing the capabilities of the world trade modeling framework. We describe the compilation of an MRIO database from the results of scenario analysis using the world trade model (WTM) in a companion article (Part II, Implementation); the subsequent application of MRIO techniques to this database permits the evaluation of prospects for the future. We also address several overlooked challenges, namely, the need to include factor endowments and distances between potential trade partners in an MRIO database, the representation of sectors providing transport of internationally traded goods, and the manipulation of mixed physical and money units when both quantities and prices are endogenous.

Combining Multiregional Input‐Output Analysis with a World Trade Model for Evaluating Scenarios for Sustainable Use of Global Resources, Part II: Implementation

SummaryThe standard multiregional input‐output (MRIO) framework can be combined with the outcomes of analysis using a model of the world economy to calculate footprints and other path‐based results for scenarios about the future. A companion article, entitled “Combining multiregional input‐output analysis with a world trade model for evaluating scenarios for sustainable use of global resources, part I: Conceptual framework,” describes our approach for extending the reach of MRIO techniques from descriptions of the past to prospects for the future. Here, we demonstrate the mathematics for converting scenario outcomes obtained using an input‐output (I‐O) model of the world economy to MRIO flow tables and then applying MRIO footprinting techniques to the resulting MRIO database. A numerical example comparing water footprints under alternative scenarios demonstrates that the world model outcomes are a sounder basis for the analysis of scenarios than the standard MRIO approach and identifies the reason why this is so. The approach described in this article integrates two previously distinct lines of research in I‐O analysis, enlarging opportunities for collaboration on both the formulation and analysis of scenarios that can provide concrete guidance for longer‐term strategies.

Rents in the era of resource scarcity: global payment flows under alternative scenarios

Resource prices rise when more costly sources need to be exploited. When the world price increases, owners of low-cost sources receive scarcity rents. The magnitude of the rents depends on the range of resource qualities being simultaneously exploited and can represent a substantial transfer of wealth to those with property rights to large stocks of high-quality, easily accessible resources. These rents are bound to increase in the future along with the size of the human population, raised consumption expectations, and deployment of technologies that depend on a wider range of natural resources for their unique properties. We report results for a set of scenarios for a three-region, four-sector, three-resource world economy, where progressively increased consumer demand requires a second and then a third region to extract ore. This numerical example illustrates how the amount of rents transferred to the low-cost producers depends on the size of the low-cost endowments relative to world demand and on the differential costs of extraction relative to the highest-cost producer. The paper develops a framework for tracing global money flows from payments for specific consumer goods in one or more economies to receipts by owners of the embodied factors of production under alternative scenarios about the future. This objective requires a substantial generalization of methods utilized for ex post analysis of input-output databases for past years. For a world economy of m regions, n sectors, and k factors of production, we first compute scenario results using the World Trade Model with Bilateral Trade, then generate the Multiregional Input-Output database corresponding to each scenario, and finally compute a new Consumer-to-Factor Matrix from which the payment network is derived. JEL Classification: F18, O13, C67, C61

PREDICTING CAPITAL FLOWS AND ASSET TRANSFERS IN THE G-20

ABSTRACT The results of a world trade model that predicts capital and asset flows between the G-20 countries is presented. Each country produces one product and imports a mixture of 20 other products. The model includes agents for merchants, households, banking, production, governments, and a FOREX market. A computer application generates transactions and plots economic trends. Finally, a quantitative easing scenario is investigated displaying the impact of a large economy that expands its money supply and the resultant movement of capital and assets to other countries. Keywords capital flows, assets, consumption, saving rate, desired investment, government spending, bonds, loans, repayments and quantitative easing.