Working Paper: NBER ID: w12704
Authors: Hamid Faruqee; Douglas Laxton; Dirk Muir; Paolo Pesenti
Abstract: In the evolving debate and analysis of global imbalances, a commonly overlooked issue pertains to rising protectionism. This paper attempts to fill that gap, examining the macroeconomic implications of trade policy changes through the lens of a dynamic general equilibrium model of the world economy encompassing four regional blocs. Simulation exercises are carried out to consider the imposition of uniform and discriminatory tariffs on trading partners as well as the case of tariff retaliation. We also discuss a scenario in which a 'globalization backlash' lowers the degree of competition in import-competing sectors, and compare the implications of higher markups in the product and labor markets.
Keywords: Protectionism; Global Imbalances; Economic Activity; Trade Policy
JEL Codes: E66; F32; F47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Imposition of tariffs (F13) | Improvement in U.S. current account balance as a share of GDP (F32) |
| Imposition of tariffs (F13) | Temporary improvements in trade balances (F32) |
| Generalized 10% hike in tariffs against emerging Asia (F69) | Contraction of GDP in that region (E20) |
| Unilateral increase in tariffs (F69) | Real exchange rate appreciation (F31) |
| Real exchange rate appreciation (F31) | Boost in domestic output and consumption (E20) |
| Unilateral increase in tariffs (F69) | Negative impact on trading partners (F69) |
| Simultaneous tariff increases by all countries (F69) | Offset of terms-of-trade gains (F14) |
| Simultaneous tariff increases by all countries (F69) | Net welfare loss globally (F69) |
| Protectionism (F52) | Detrimental long-term implications for global economic stability (F65) |