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In recent years, quantitative analysis of the effects of policies on economic outcomes has grown sharply. These exercises in quantification have been made possible by advances in theory and analytical techniques, and no less importantly, by the dramatically increased computational and data processing power of computers. This paper focuses on two classes of quantitative tools – computable general equilibrium (CGE) models and gravity models. These are perhaps the most commonly encountered quantitative analytical techniques in the area of trade. The primary purpose of this paper is to offer a non-technical explanation of CGE and gravity models to trade policymakers. We try to capture the essence of the analytical techniques, explaining the requirements of the models and computational procedures. We also seek to identify as clearly as possible the strengths and limitations of these analytical techniques. A second objective of the paper is to survey a range of studies based on CGE, particularly simulations of multilateral trade negotiations, and gravity models. The survey is useful in conveying a sense of how results can vary depending on what goes into the models by way of their structure and data, emphasizing the importance of judicious, critical interpretation. The main benefit of CGE models is that they offer a rigorous and theoretically consistent framework for analysing trade policy questions. The numbers that come out of the simulations should only be used to give a sense of the order of magnitude that a change in policy can mean for economic welfare or trade. Much more can be done to create confidence in the results. The simulations should benefit from more systematic and informative employment of sensitivity analysis. Ex-post validation of CGE models is needed to increase confidence in the numerical results. Correctly specified gravity models can illuminate questions that are important for trade policymakers. For example, what are the trade effects of WTO membership? How does entering a proposed preferential trade arrangement (PTA) affect a country's trade? How is non-members' trade affected? Does more trade lead to faster growth? Does trade improve the environment? Three important theoretical requirements that need to be taken into account in gravity models are highlighted in this study. First is the importance of relative distance and trade costs. Second is that liberalization, whether multilateral or regional, creates new trading relationships and not just increases the volume of existing trade. Third, trade is dynamic and this shows itself in new products and new firms that enter international commerce.

AbstractThis paper investigates whether participation in global value chains (GVCs) fosters innovation. Using industry‐level patent data for 25 countries, we estimate how the pool of foreign R&D expenditure available through global value chains affects the production of ideas at home. We find that GVCs boost innovation on average by 5% both in developed and emerging economies. We further show that international knowledge spillovers require good absorptive capacity in the knowledge‐receiving country and that their strength depends on both forward and backward GVC linkages.

Do WTO commitments reduce the risk of trade policy reversals? To address this question, we rely on the theoretical model of varying cooperative tariffs by Bagwell and Staiger (1990) to specify our empirical model for the probability of a tariff increase. We then study how WTO tariff commitments affect this probability. We estimate our model using a database of WTO bound tariffs that we built for all WTO Members from 1996 to 2011 at the HS 6-digit level of disaggregation. Our results show that WTO commitments significantly reduce the probability of a tariff increase, even when the bound tariff is above the MFN applied rate. In addition, the WTO reduces trade policy uncertainty through its monitoring function. These results are robust to including political economy explanations of tariff changes and to addressing endogeneity concerns.

Do WTO commitments reduce the risk of trade policy reversals? To address this question, we rely on the theoretical model of varying cooperative tariffs by Bagwell and Staiger (1990) to specify our empirical model for the probability of a tariff increase. We then study how WTO tariff commitments affect this probability. We estimate our model using a database of WTO bound tariffs that we built for all WTO Members from 1996 to 2011 at the HS 6-digit level of disaggregation. Our results show that WTO commitments significantly reduce the probability of a tariff increase, even when the bound tariff is above the MFN applied rate. In addition, the WTO reduces trade policy uncertainty through its monitoring function. These results are robust to including political economy explanations of tariff changes and to addressing endogeneity concerns.

One of the goals of the multilateral trading system is to enhance the stability and predictability of the environment in which traders operate.Binding tariffs at the WTO reduces the scope for their discretionary use. But, countries have bound tariffs at ceiling levels often substantially above the level of applied tariffs. Therefore, whether the ceiling rate at which countries have committed at the WTO is sufficient to diminish trade policy volatility is an empirical question. Using a recently built database on applied tariffs covering over 100 countries for the period 1996 to 2009, we find evidence that countries do vary tariffs. Most importantly, we find evidence that applied tariffs of tariff lines that are bound are more likely to be decreased and less likely to be increased, and that this taming effect of the binding decreases with the level of the water (i.e. the gap between bound and applied tariff). This finding is robust to controlling for political economy determinants of tariffs and to factors related to the economic cycle.

The Cotonou Agreement introduces new fundamental principles with respect to trade between the European Union and African, Caribbean and Pacific countries relative to the Lomé Convention: in particular non-reciprocal preferential market access for ACP economies will only last until 1 January 2008. After that date, it will be replaced by a string of Economic Partnership Agreements meant to progressively liberalise trade in a reciprocal way. The progressive removal of barriers to trade is expected to result in the establishment of Free Trade Agreements between the EU and ACP regional groups in accordance with the relevant WTO rules and help further existing regional integration efforts among the ACP. In this paper, an applied general equilibrium model (15 regions, 9 sectors) is used to simulate the impact of EPAs for countries of the Southern African Development Community. The standard Global Trade Analysis Project (GTAP) model has been extended to include the elimination of textile quotas, EU enlargement to 25 members as well as tax revenue sharing and a common external tariff among Southern African Customs Union countries. A number of comparisons between different scenarios are undertaken, in particular: (i) the EPA scenario is compared to the multilateral liberalization scenario; (ii) SADC liberalization with the EU only is compared to a scenario with simultaneous regional integration among African economies and to the case of the EU also signing an FTA with Mercosur; and (iii) a complete reduction of import barriers is contrasted with partial liberalization (i.e. only 50 per cent tariff reductions in agriculture) and with full trade liberalization that includes the elimination of subsidies. The issue of tariff revenue loss is also addressed and the required tax replacement is calculated. Selected experiments are re-run under an unemployment closure. Simulation results show that EPAs with the EU are welfare-enhancing for SADC overall, leading also to substantive increases in real GDP. For most countries further gains may arise from intra-SADC liberalization. The possibility of the EU entering an FTA with other countries, such as Mercosur, reduces estimated gains, but they still remain largely positive. Similarly, estimated gains need to be revised downwards if agriculture liberalization is not as far reaching as a reduction of import barriers for manufactures. At the sectoral level, the largest expansions in SADC economies take place in the animal agriculture and processed food sectors, while manufacturing becomes comparatively less attractive following EU-SADC liberalization. Interestingly, multilateral liberalization would instead foster some of the manufacturing sectors (textile and clothing and light manufacturing). Results also show the need for the SACU tariff pooling formula to be adjusted to reflect new import patterns as tariffs are removed.

When looking at the conditions of trade in natural resources the world appears upside down: Tariff protection in natural resources sectors is generally lower than for overall merchandise trade, while export restrictions are twice as likely as in other sectors. On the other hand, tariff escalation is significant in natural resources sectors, where materials in their raw state face, on average, lower duties than in their processed form. In this paper, we discuss how export taxes and tariff escalation may be the result of an uncooperative trade policy. Specifically, tariff escalation and export taxes can be beggar-thy-neighbor policies because governments may be tempted to use them to alter the relative price of exports to their advantage (terms-of-trade effect) or to expand the domestic processing industry at the expenses of foreign production (production relocation effect). In equilibrium, these policies offset each other in a Prisoners' Dilemma situation, where trade is inefficiently low.