Rising Protectionism and Global Value Chains: Quantifying the General Equilibrium Effects

50 Pages Posted: 10 Jan 2020

See all articles by Rita Cappariello

Rita Cappariello

Bank of Italy

Vanessa Gunnella

European Central Bank (ECB)

Sebastian Franco-Bedoya

World Bank

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation

Multiple version iconThere are 3 versions of this paper

Date Written: January, 2020

Abstract

Quantifying the effects of trade policy in the age of 'global value chains' (GVCs) requires an enhanced analytical framework that takes the observed international input-output relations in due account. However, existing quantitative general equilibrium models generally assume that industry-level bilateral final and intermediate trade shares are identical, and that the allocation of imported inputs across sectors is the same as the allocation of domestic inputs. This amounts to applying two proportionality assumptions, one at the border to split final goods and inputs, and another behind the border to allocate inputs across industries. In practice, neither assumption holds in available input-output data sets. To overcome this limitation of existing models, we consider a richer input-output structure across countries and sectors that we can match with the actual structure reported in input-output tables. This allows us to investigate the relation between the effects of changes in trade policies and GVCs. When we apply the enhanced quantitative general equilibrium model to the assessment of the effects of Brexit, we find trade and welfare losses that are substantially larger than those obtained by previous models. This is due to the close integration of UK-EU production networks and implies that denser GVCs amplify the adverse effects of protectionist trade policies.

Keywords: Brexit, supply chains, trade model, trade policy shocks

JEL Classification: F13, F15, F40, F60

Suggested Citation

Cappariello, Rita and Gunnella, Vanessa and Franco-Bedoya, Sebastian and Ottaviano, Gianmarco I.P., Rising Protectionism and Global Value Chains: Quantifying the General Equilibrium Effects (January, 2020). ECB Working Paper No. 2360. Available at SSRN: https://ssrn.com/abstract=3517293

Rita Cappariello (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Vanessa Gunnella

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Sebastian Franco-Bedoya

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation ( email )

Via Gobbi 5
Milan, 20136
Italy

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