## Modeling Trade Tensions: Different Mechanisms in General Equilibrium

_IMF Working Papers, December 11, 2020_

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## Bibliographic details
- Authors: Benjamin L Hunt, Susanna Mursula, Rafael A Portillo, Marika Santoro
- Published: December 11, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513561615.001

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### Overview and objective
- Investigates mechanisms through which import tariffs impact the macroeconomy using two large-scale workhorse models for quantitative policy analysis: a computational general equilibrium (CGE) model (Purdue University GTAP model) and a multi-country dynamic stochastic general equilibrium (DSGE) model (IMF GIMF model).
- Objective: compare and interpret the distinct channels by which tariffs affect aggregate outcomes and discuss ways to combine model estimates for a more complete assessment.

### Key findings: mechanisms and model interpretations
- GTAP (CGE) channel:
  - Higher tariffs generate a loss in terms of output arising from an inefficient reallocation of resources between sectors.
  - Effect interpreted as an impact of tariffs on aggregate productivity.
- GIMF (DSGE) channel:
  - Tariffs act as a disincentive to factor utilization (consistent with behavior in other DSGE models).
  - Effect interpreted as an impact of tariffs on factor supply/utilization.
- Synthesis:
  - The two models/channels can be broadly interpreted as capturing impacts on different components of a country’s aggregate production function: aggregate productivity (GTAP) versus factor supply/utilization (GIMF).
  - Combining estimates from both models provides a more complete assessment of the macro effects of tariffs.

### Implications for quantitative policy analysis
- Model choice matters: quantitative effects of tariff increases reflect different underlying mechanisms that are model-specific.
- Interpretation guidance:
  - Use GTAP results to quantify reallocation and productivity-driven output losses.
  - Use GIMF results to quantify disincentives to factor use and associated dynamic responses.
- Combining approaches:
  - Integrate insights from both productivity-channel and factor-utilization-channel estimates to capture broader macroeconomic effects of tariffs.

### Keywords and topical focus
- Subject areas: Economic sectors, Financial crises
- Keywords: general equilibrium, Nominal and real rigidities, trade elasticity, Trade policy

*Modeling Trade Tensions: Different Mechanisms in General Equilibrium, IMF Working Paper No. 2020/279 (December 11, 2020).*

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_Source: https://www.imf.org/en/publications/wp/issues/2020/12/11/modeling-trade-tensions-different-mechanisms-in-general-equilibrium-49869_