Trade elasticities for CGE simulation: case of U.S. tariff shocks

Abstract Evaluating the economic impact of trade policy in computable general equilibrium (CGE) models relies on the trade elasticities. This study builds a new, internally consistent database of trade elasticities that can be directly integrated into the CGE framework.We estimate a structural gravity model by Poisson pseudo maximum likelihood (PPML), using bilateral HS6 trade flows and applied tariff rates. The estimation yields elasticities for approximately 5,000 HS6 products, covering nearly the entire classification. The median elasticity is 5.28, and the 10th to 90th percentile span is 1.49 to 15.33, underscoring pronounced heterogeneity in price sensitivity.Each product is mapped to one of the 47 GTAP goods sectors, and the resulting elasticities are compared with the region-generic default values. The simulation experiments on U.S. tariff shocks are conducted using the estimated elasticities as well as the GTAP default parameters. The results reveal that the difference in elasticity affects bilateral imports of goods the most, leading to sign reversals of macroeconomic variables, including GDP, economic welfare, and real income for some countries.