Trade Wars and Trade Deals: Estimated Effects using a Multi-Sector Model

IMF Working Papers, July 3, 2019

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Study uses a multi-sector computable general equilibrium (CGE) trade model calibrated to 165 countries.
Analyzes three illustrative scenarios to estimate potential long-term effects of trade policy changes.
Emphasis on sectoral disruptions, spillovers to exposed ‘by-stander’ economies, and heterogeneity at the subnational level.

Three scenarios:
- Potential U.S. auto tariffs.
- A ‘transactional deal’ between the U.S. and China to close their bilateral deficit.
- A potential escalation in bilateral tariffs between the U.S. and China in the absence of such a deal.

Overall effects on GDP tend to be relatively small albeit negative in most cases, including for the U.S.
Sectoral disruptions can be large.
Positive and negative spillovers to highly exposed ‘by-stander’ economies can be large.
Heterogeneity at the subnational level in the U.S.: richer states tend to benefit from certain scenarios.
Estimated impacts depend on the extent to which the U.S. is able to re-shore production in protected sectors.
Results can usefully complement estimates obtained through macroeconomic models that better capture dynamic effects, such as those stemming from trade policy uncertainty.
Results underscore the value of adhering to the existing levels of liberalization, and highlight the risks associated with a fragmentation or even a complete breakdown of the trading system.

Consider trade policy uncertainty and dynamic macroeconomic effects alongside static CGE estimates.
Evaluate the capacity and costs of re-shoring production when designing protectionist measures.
Monitor sectoral exposure and by-stander economy vulnerabilities when negotiating or implementing tariffs.
Preserve existing levels of liberalization to reduce risks from fragmentation or breakdown of the trading system.

Trade Wars and Trade Deals: Estimated Effects using a Multi-Sector Model, Carlos Caceres, Diego A. Cerdeiro, Rui Mano, July 3, 2019.