US Withdrawal From International Trade: Analyzing the Impact on the Global Trading System With a Global CGE Model and a Gravity Model

Current US trade policy goals may result in a withdrawal of the US from the global trading system. The impact may be local, as NAFTA is renegotiated, or more widespread, as the US becomes generally more protectionist. We analyze the possible effects on the US economy and on the global trading system using two modelling approaches: (1) a global computable general equilibrium (CGE) model of the world economy to consider trade war scenarios, and (2) a global gravity model to consider scenarios of trade diversion around the US. Analysis of trade share changes using a CGE model is constrained by functional form. Virtually all trade-focused CGE models adopt the “Armington” convention and use a constant elasticity of substitution (CES) function to represent preferences over imports and the domestic variety. All goods are “semi-tradable” and trade shares can only change due to price shocks (e.g., tariff changes). The policy shocks that the US is planning to implement involve a variety of non-tariff approaches and are likely to result in other countries diverting their trade regardless of simple price incentives (e.g., move value chains away from the US). We explore the effects of such non-price changes in trade shares using a new form of a gravity model, focusing directly on quantity trade shares. We use an “entropy gravity model” starting with the initial matrix of global trade shares by country We then specify that the US will reduce its total exports (or sectoral exports) by an exogenous amount. We then specify constraints on the trading system: (1) Country trade balances remain constant, and (2) the volume of global trade remains constant. The result is to focus only on trade diversion. Initial scenario analysis indicates that, globally, countries can divert trade around the US relatively easily (modest changes in trade shares). Countries initially very dependent on the US (e.g., Canada, Mexico) are hurt, but almost all other countries expand their trade.