Adding General Equilibrium Feedback into Industry-Specific Models of Trade Policy

Industry-specific partial equilibrium models of trade policy have several practical advantages. They can capture the distinctive and sometimes complex features of an industry and the fine details of a proposed trade policy. However, partial equilibrium models do not address spillovers to the broader economy or general equilibrium feedback, which can sometimes matter in trade policy analysis. This paper develops a method for adding a general equilibrium extension onto an industry-specific model of trade policy. Using this method, I simulate the economic effects of hypothetical changes in tariffs on U.S. imports of manufactured goods. The simulations demonstrate the usefulness and adequacy of partial equilibrium models. They indicate that a general equilibrium extension can improve estimates of the effects of an industryspecific policy change, but only if the industry comprises a relatively large share of the economy. The simulations also demonstrate that a partial equilibrium model can provide an estimate of the percent change in the value of the aggregate output of the economy that is usually quite close to the estimate from a more extensive general equilibrium model.