With the onset of the global financial crisis, the longstanding downward trend in tariffs and other barriers to trade has largely come to a halt. Recent political events – such as the Brexit vote in the United Kingdom, the shift in US trade policy and international responses to it – indicate a danger of rising protectionism and repatriation of production and consumption. In a highly interconnected world economy with global value chains (GVCs), the productivity of domestic industries depends on the availability of imported inputs. And because imported inputs complement the productivity of domestic labor, the fraction of workers who stand to lose from protectionism is large. To exemplify this, the Bank for International Settelements (BIS) study the effects of one hypothetical protectionist measure – the case of revoking NAFTA – in the global network of input-output trade.
Explanation data-model
To examine the general equilibrium effects this policy would have, we combines the multi-sector, multi-country, multi-factor general equilibrium Ricardian trade model with a specific-factors model that generates distributional effects of trade across sectors. We calibrate the model to the global matrix of intermediate and final goods trade from the 2016 edition of the World Input-Output Database (WIOD) and the WIOD’s Socioeconomic Accounts. We then simulate two hypothetical scenarios in which NAFTA is rolled back in full or in part.
Conclusion
Today’s global production arrangements could lead to strong spillovers of protectionist policies. Barriers to input trade can reduce the competitiveness of domestic industries as internationally sourced inputs become more expensive. In a global input-output network, a tariff aimed at one specific trade partner or import sector ultimately affects all sectors of the domestic economy, yet very heterogeneously so. In a highly interconnected world economy with supply chains crossing country borders, the equilibrium effects of protectionism can be very different from what simple measures, such as exposure to import competition might suggest.
Who gains and who loses
In this paper, we exemplify these channels and undertake a quantitative assessment of both the aggregate and the distributional effects of one hypothetical protectionist policy: revoking NAFTA. We find that NAFTA revocation would lower real incomes in the large majority of sectors in all three NAFTA countries, and that average wages would fall in nearly all regions in North America. While there would be differences in outcomes acrosslocations, hardly anybody would gain in net terms. Correlating real wage changes with simpler and intuitive measures of trade, we highlight why this is the case: while higher trade barriers would shield some domestic industries from import competition, the resultingwage gains would be more than offset by the detrimental effects of reduced export opportunities and the increased costs of imported inputs for manufacturing firms. Our results underscore the importance of modelling the general equilibrium impact of protectionism and looking beyond simple heuristic judgements about who gains and who loses from trade policy changes in the current global production economy.
You can read the full version of the paper on the website of the BIS.
Source: www.bis.org
