Multi-regional General Equilibrium Model Research Articles

The impact of rising maritime transport costs on international trade: Estimation using a multi-region general equilibrium model

This paper evaluates the impact of the 2021–22 surge in rates for containerized and bulk shipping costs. Employing a detailed transport database and applying a set of detailed shocks by transportation mode, regions and commodities in a multi-region general equilibrium model, the paper analyses the sectorial (agri-food sectors, manufacturing) and macroeconomic (trade, wide-economic indicators) impacts of the recent surge in shipping costs. Maritime transport costs are sensitive to imbalances between global demand and supply, which rose further after the Covid-19 pandemic. In a globalised world, an increase in shipping rates can have widespread repercussions on international trade, creating risks for the global economic activity. The results allow the analysis of how shocks in transport costs can affect prices in international trade and explain the short- and medium-term impacts on the economy. The main finding is that rising maritime transport costs tend to reverse the trend towards globalisation of international trade and favour localization.

Fiscal consolidation during the pandemic

In connection with the increase in public debt induced by the growth of government expenditures aimed at reducing negative effects of the global pandemic, the analysis of such policy measures as fiscal consolidation is an urgent issue. In this paper, we analyze gains and losses of fiscal consolidation aimed at gradually reducing government debt to pre-pandemic levels by raising taxes. Within the framework of the global multi-regional general equilibrium model with overlapping generations (CGE-OLG), we consider scenarios of local (single region) and global consolidation. As a result, we have found that local consolidation leads to insignificant losses in terms of output in the Russian economy in the short term and to more significant losses in developed countries, whose budgetary expenditures were significantly higher during the pandemic. In the long run, there is a positive effect on the level of output in all economies. Another important result is the additional positive effect of global consolidation giving higher output values compared to local consolidation.

The other trade war: Quantifying the Korea–Japan trade dispute

In mid-2019 a new trade war between Korea and Japan started heating up, while the U.S.–China trade war held the spotlight. This paper documents the recent Korea–Japan trade dispute and quantifies its economic impacts. We consider a set of non-tariff distortions—Japanese export controls combined with Korean boycotts of Japanese goods. We simulate the impact of these actions using a multi-region general equilibrium model calibrated to the GTAP version 10 accounts and observed trade responses in the Korea Customs Service data. We find a welfare loss of 0.144% ($1.0 billion) for Korea and 0.013% ($346 million) for Japan. Sectoral impacts include a 0.25% reduction in chemical production in Japan. In Korea the reduction in imports from Japan is offset by increases in domestic production and imports from other countries.

The impact of GST reform on Australia’s state and territory economies

ABSTRACT We use a multi-regional general equilibrium model and a multi-regional microsimulation model to explore the economic consequences of a Goods and Services Tax (GST) rate rise and broadening of the GST base for Australia’s eight states and territories. We identify the states and territories adversely affected by GST change, and explain the regional structural factors responsible for differences in regional impacts. These findings have policy relevance in the context of Australia’s GST framework, which requires unanimous state and territory support for GST change.

Effects of Implementation of Green Tax on Environmental Pollutants’ Dispersion on Macroeconomic Variables: Application of Multi-Regional General Equilibrium Model

The present paper aims to determine the effects of various scenarios of green tax burden on pollution dispersion and multiple macro-economic variables such as GDP along with welfare and inflation. In addition, the effects of technical progress on major pollutant industries such as coal, oil and gas were evaluated. For this purpose general multiregional equilibrium method (GTAP-E) was used. The results of the study indicated that under low tax rate scenario, GDP remained unchanged. Increase in the carbon tax rate would not followed by increase in GDP. Energy consumption and social welfare increased but inflation decreased. Furthermore, increase in efficiency along with advance technology caused reduction in dispersion of environmental pollutants along with GDP growth and consequent increase in government tax revenue.

Economic evaluation of the effects of exerting green tax on the dispersion of bioenvironmental pollutants based on multi-regional general equilibrium model (GTAP-E)

ABSTRACT The present study calculates the temporal value of energy money based on green scenario of tax on the dispersion of bioenvironmental pollutants using global trade analysis project-energy substitution (GTAP-E) and investigates the changes brought about in carbon dioxide, GDP along with CIF for 2016 in Iran and eventually presents an evaluation of such sectors as coal, oil, gas, and petroleum products. The results indicated that the implementation of green tax scenario along with technological progress causes reduction by −0.19% in temporal value of pollution money in coal sector and the effect of monetary value of energy carriers on oil was also found reduced by −0.67% and the percentage reduction is about −0.1 in contrast to the other countries. At first, the direct and indirect coefficients (Leontief inverse) and the multiplying coefficients of bioenvironmental pollutants were computed using input-output matrix table technique. It was figured out that the highest pollution is caused by CO2 in this sector. But, the highest pollution in agriculture and mine sectors, substantially as a result of gasoil consumption, is caused by CO that is currently showing an ascending trend. Thus, it is recommended that the government should provide with the possibility of having access to modern global technologies via making imports. In the energy sector, Iran is recommended to reduce its CO2 production compared to what is currently being produced. The speed of pollutants emissions can be reduced by raising taxes in the energy sector.

The Alibaba effect: Spatial consumption inequality and the welfare gains from e-commerce

Domestic trade costs reduce aggregate welfare and result in worse access to consumption goods in small and remote cities. As a new trade technology, e-commerce can increase inter-city trade and alleviate spatial consumption inequality because it (1) eliminates the fixed cost of market entry, and (2) reduces the effects of distance on trade costs. Using unique data from China's leading e-commerce platform, we provide evidence consistent with these two features: online trade is less hindered by distance relative to offline trade, and residents from smaller and more remote cities spend a larger fraction of their income online. We then build a multi-region general equilibrium model to quantify the impacts of e-commerce on domestic trade and welfare. We find that although it partially crowds out inter-city trade originally taking place offline, the emergence of e-commerce increases the aggregate domestic trade. The welfare gains from e-commerce are 1.6% on average, and are about 30% larger for cities in the smallest population and market potential quintiles.

Effects of sea level rise on economic development and regional disparity in China

Among the climate change-induced threats to coastal regions, sea level rise is considered as the most serious one. Most large and prosperous cities in China are located along coastal regions and are thus likely to suffer huge economic impacts when a sea level rise occurs. The effects on coastal regions can also be transmitted to inland regions through movement of labor and trade, thus affecting regional disparity. To strengthen evidence-based policies of abatement and adaptation, it is essential to assess the economic impacts of sea level rise in addition to the physical impacts already investigated in the literature. Based on data from GIS analysis of flooded areas, this study uses a state-of-the-art technique (TERM-China, a multiregional general equilibrium model of China) to evaluate the economic impacts of sea level rise. The simulation results suggest that if the sea level rise coincides with sudden-onset extreme storm surges, the coastal regions’ GDP loss would reach 11% in 2050, wherein Tianjin, Shanghai, and Jiangsu would have the most severe losses with over a 20% decline in their individual GDP in 2050. At the sectoral level, high capital-intensive sectors have more significant output losses. Our results also indicate that sea level rise could cause more unemployment in developed coastal regions, drive people to other developing inland regions, and even convert some mega-cities into middle-scale cities.

Assessment of impacts of Hubei Pilot emission trading schemes in China – A CGE-analysis using TermCO2 model

Among the seven Pilot Emission Trading Schemes (ETS) in China, the ETS in Hubei province exerts significant influences. And Hubei’s economic and social contexts are very similar to China as a whole. By applying a Chinese multi-regional general equilibrium model (TermCO2), this paper simulates the economic and environmental impacts of the Hubei Pilot ETS, under a scenario based on the institutional factors of this Pilot ETS and careful consideration is given to ETS coverage. The results show that the Hubei Pilot ETS has significantly reduced carbon emission while its adverse impact on economy is relatively negligible. The carbon emission of Hubei in 2014 is reduced by 1.00% (6.98 million tons) at an average carbon price of 34.31 Yuan per ton. However, the provincial GDP only declines slightly by 0.06% (1.48 billion Yuan) and the average GDP loss is 212.09 Yuan per ton. Meanwhile, Hubei’s economic structure has been adjusted, and the provincial employment and investment rate decreases by 0.09% and 0.33% respectively. However, due to income distribution effect caused by free allowances, the provincial household consumption increases by 0.35% and the consumer price index (CPI) increases slightly by about 0.02%.

Business as UNusual: The Implications of Fossil Divestment and Green Bonds for Financial Flows, Economic Growth and Energy Market

Green bonds and fossil divestment has emerged as a bottom-up approach to climate action within the business community. Recent pledges by large banks and institutional investors have reached levels that have the potential to contribute markedly to a low carbon transition. This paper traces the impact of green finance in a multiregional global general equilibrium model with non-fossil and non-coal segments of financial flows in addition to the usual unconstrained market for funding. Our high green finance scenario reflects a reasonable upscaling of current level of pledges towards 2030. The study shows that green finance shifts the investments towards industries generating more value added and increasing GDP, future savings and investments. The green finance leads to a lower return on investments and a transfer of income from investors to wage income. Russia and China see the largest cost increase in coal investments due to constraints on finance for fossil industries. The green finance reduces coal consumption by 2.5 per cent below BAU in 2030 and raises the share of non-fossil electricity from 42 to 46 per cent at the global level. Over the whole period towards 2030, the green finance avoids global CO2 emissions corresponding to the total emissions of European Union and Japan in a recent year.

The Alibaba Effect: Spatial Consumption Inequality and the Welfare Gains from E-Commerce

Studies show that differential access to varieties of goods contributes to inequality in living standards across cities. By eliminating the fixed cost of entry for firms, e-Commerce might disproportionately improve smaller cities’ access to varieties, and reduce this inequality. Using unique data from China’s leading e-Commerce platform, we first document a negative relationship between online purchasing intensity and market size. We then build a multi-region general equilibrium model to quantify the welfare gains from e-Commerce. With an average of 1.62 percent, the welfare gains are 0.94 percentage point higher for cities in the 1st population quintile than those in the 5th quintile.

Allocative inefficiency and sectoral allocation of labor: Evidence from U.S. agriculture

Are productivity differences across producers in an industry a good indicator of allocative inefficiency? If so, what are the welfare consequences of reallocating labor from lesser to more productive producers? This paper addresses these questions in the context of factor specificity, which generates endogenous distribution of total factor productivity across producers, and reallocation of labor across sectors, as well as within a sector. The paper builds a multi-sector, multi-region general equilibrium model with land as a region-specific factor, and calibrates it using state-level U.S. data from 1960 to 2004, a period with considerable reallocation of labor out of agriculture. The results show that large and persistent differences in agricultural productivity across U.S. states are consistent with factor specificity due to geoclimatic conditions and do not correspond to economically significant allocative inefficiencies.

Linking the emissions trading schemes of Europe and China - Combining climate and energy policy instruments

Both Europe and China have announced targets for greenhouse gas emissions reduction and renewable energy development. To achieve their emissions targets, Europe has introduced emissions trading scheme (ETS) since 2005 and China has planned to establish a national ETS in 2015. We assess the impact of a joint Europe-China ETS when both climate and energy policy instruments are simulated in a multiregional general equilibrium model. Our results show that a joint ETS markedly increases total carbon emissions from fossil fuels even though global mitigation costs are reduced. Moreover, a joint ETS helps China achieve its renewable energy target, but for Europe, it works opposite. While the renewable energy target does not help Europe achieve additional abatement, the renewable energy target in China reduces mitigation costs and emissions, and increases renewable energy consumption and sales of carbon allowances. Financial transfer through a joint ETS remains marginal compared to China’s demand for renewable energy subsidies. We conclude that as long as an absolute emissions cap is missing in China, a joint ETS is not attractive for mitigation and China’s renewable energy target can reduce emissions.

(Reducing Greenhouse Gas Emissions in Integrated Multi-Regional General Equilibrium Models with Overlapping Generations)

Russian Abstract: В настоящей работе описывается динамическая интегрированная мульти–региональная модель климата и экономики с перекрывающимися поколениями. На основе построенной модели в численном имитационном анализе анализируются исходы игры Нэша относительно снижения выбросов парниковых газов и оптимальная траектория снижения выбросов в рамках глобальной коалиции. Особое внимание уделяется чувствительности результатов анализа к социальной норме межвременных предпочтений.English Abstract: This paper describes a dynamic integrated multi-regional model of climate and the economy with overlapping generations. On the basis of the constructed model in numerical simulation analysis with respect to the outcome of the reduce greenhouse gas emissions and optimal trajectory to reduce emissions in a global coalition and Nash games are analyzed. Particular attention is paid to the sensitivity of the analysis to the social time preference rate.

Assessing Socioeconomic Impacts of Transport Infrastructure Projects in the Greater Mekong Subregion

This study attempts to quantify the links between infrastructure investment and poverty reduction using a multi-region general equilibrium model, supplemented with household survey data for the Greater Mekong Subregion (GMS). Infrastructure investment is an important step in economic development, with improvements in transportation infrastructure boosting economic opportunities throughout the region, for example by significantly reducing travel times and costs. In this study, we concentrate on quantifying the effects of some of the key linkages between upgraded infrastructure, economic growth, and poverty reduction. We model the impact of both reducing transport costs and improving trade facilitation in the GMS. Our findings suggest strong gains to the GMS countries as a result of infrastructure development and trade facilitation with national poverty reduced throughout the region. However, the impact on various segments of these populations differs, depending in part on factor returns.

Forward-looking versus recursive-dynamic modeling in climate policy analysis: A comparison

This paper develops a multi-regional general equilibrium model for climate policy analysis based on the latest version of the MIT Emissions Prediction and Policy Analysis (EPPA) model. We develop two versions so that we can solve the model either as a fully inter-temporal optimization problem (forward-looking, perfect foresight) or recursively. The standard EPPA model on which these models are based is solved recursively, and it is necessary to simplify some aspects of it to make inter-temporal solution possible. The forward-looking capability allows one to better address economic and policy issues such as borrowing and banking of GHG allowances, efficiency implications of environmental tax recycling, endogenous depletion of fossil resources, international capital flows, and optimal emissions abatement paths among others. To evaluate the solution approaches, we benchmark each version to the same macroeconomic path, and then compare the behavior of the two versions under a climate policy that restricts greenhouse gas emissions. We find that the energy sector and CO 2 price behavior are similar in both versions (in the recursive version of the model we force the inter-temporal theoretical efficiency result that abatement through time should be allocated such that the CO 2 price rises at the interest rate.) The main difference that arises is that the macroeconomic costs are substantially lower in the forward-looking version of the model, since it allows consumption shifting as an additional avenue of adjustment to the policy. On the other hand, the simplifications required for solving the model as an optimization problem, such as dropping the full vintaging of the capital stock and fewer explicit technological options, likely have effects on the results. Moreover, inter-temporal optimization with perfect foresight poorly represents the real economy where agents face high levels of uncertainty that likely lead to higher costs than if they knew the future with certainty. We conclude that while the forward-looking model has value for some problems, the recursive model produces similar behavior in the energy sector and provides greater flexibility in the details of the system that can be represented.

Spatial patterns of biodiversity conservation in a multiregional general equilibrium model

Migration dynamics and local biodiversity are interrelated in a way that is likely to affect patterns of regional specialisation. We assess this relationship with a New Economic Geography model that has been extended with biodiversity. Biodiversity is heterogeneous, and responds to habitat availability. The results indicate that a symmetric pattern of regional specialisation is more likely, and that additional equilibria may emerge as the marginal utility of biodiversity increases. In the policy analysis we focus on the case where the overall social optimum is symmetric and show that it can be supported as a non-cooperative Nash equilibrium. However, multiple Nash equilibria may exist.

Distortion Costs and Effects of Price Liberalisation in Russian Energy Markets: A CGE Analysis

Russia’s economy is energy intense and wasteful of resources. This situation has arisen in part due to the country’s ample energy supplies and regulated privileges for domestic consumers. Recently enacted and proposed reforms intended to increase the efficiency of the energy sector by raising domestic energy prices also have implications for the export levels of Russian energy commodities. In this study, we estimate the costs of the subsidised energy system in an allocative sense and then analyse recent moves of the Duma to boost gas and electricity prices to bring them into line with market-based pricing. Our analysis uses a multi-region general equilibrium model (GTAP) modified to express the global dimensions of the subsidisation policy and suggested reforms. Preliminary results show that current subsidies extract over 6% of GDP and limit the potential benefits of Russia’s comparative advantage in energy commodities. Increases of 6% in electricity and 10% in the price of regulated gas improve efficiency by reducing distorting subsidies and distinctly shifting output from domestic markets to exports.

Estimating the Impact of Transgenic Bt Cotton on West and Central Africa: A General Equilibrium Approach

Summary. — West and Central Africa (WCA)s cotton sector is experiencing rising production costs and lower yields, reversing decades of growth. Declining input use, soil fertility and inefficient chemical pest controls are contributing factors. We evaluate the potential impact of Bt cotton on WCA using a multiregion general equilibrium model and multicountry estimates of Bt-induced productivity. We find that Bt cotton raises growers returns, land value and welfare. Released labor from cotton is shifted to food crops hence reducing labor shortage constraints. Overall, results indicate that potential gross benefits from Bt cotton are substantial for WCA cotton sector, and that the economic costs of nonadoption are equally significant. Published by Elsevier Ltd.

Trade policy analysis in the presence of duty drawbacks

Duty drawback schemes, which typically involve a combination of duty rebates and exemptions, are a feature of many countries’ trade regimes. They are used in highly protected, developing economies as means of providing exporters with imported inputs at world prices, while maintaining the protection on the rest of the economy. This paper presents an empirical multi-region general equilibrium model, in which the effects of policy reform are differentiated based on the trade-orientation of the firms. The model can be used to analyze trade liberalization in the presence of duty drawbacks, assess whether countries should introduce or abolish these types of arrangements, evaluate outcomes under alternative trade liberalization paths and the impact of improved duty drawback system administration. In the case of China’s recent WTO accession, the analysis shows that failure to account of duty exemptions will lead to an overstatement of the increase in China’s trade flows by 40%, China’s welfare by 15%, and exports of selected sectors by as much as 90%. The magnitude of the bias depends on the level of pre-intervention tariffs and the size of tariff cuts — the larger the initial distortions and tariff reductions, the larger the bias when duty drawbacks are ignored. The bias in the estimates of China’s real GDP, trade flows and welfare changes due to WTO accession increases more than three times when China’s pre-intervention tariffs are raised from their 1997 levels to the much higher 1995 levels. These results suggest that studies, focusing on economies in which protection is high, import concessions play an important role and planned tariff cuts are deep, must treat duty drawbacks explicitly in order to avoid serious errors in their evaluation of policy outcomes from trade reform.