Quantifying Disruptive Trade Policies

We present an innovative analytical framework that captures key mechanisms of international trade, and we demonstrate its usefulness as a tool for quantitative trade policy analysis. Our application relates to the tariff changes implemented by the United States in 2018 with subsequent retaliations by partner countries, particularly China. The framework is a multi-region multi-sector general equilibrium simulation model of the global economy. Our core contribution is to introduce a new trade structure that includes monopolistic competition among bilateral representative firms (BRF). We compare simulation results from the BRF structure to those from standard trade formulations of perfect and monopolistic competition. We find that the BRF structure leads to substantially larger trade and welfare changes induced by tariff shocks.