Quantifying Economic Impacts of Trade Agreements with Heterogeneous Trade Elasticities

Bilateral trade relationships between countries vary across products. Such heterogeneity poses challenges when assessing the economic impacts of trade agreements. This paper estimates bilateral trade elasticities at the product level and explores these impacts using a hypothetical no-deal Brexit as an example. The findings indicate that the European Union’s demand for the United Kingdom’s products is often less elastic compared to products from other trading partners. The findings also show substantial heterogeneity in the elasticities across products and a negative correlation between these elasticities and tariffs. These factors mitigate the extent of trade welfare losses compared to a scenario using homogeneous elasticities.