Would Protectionism Defuse Global Imbalances and Spur Economic Activity? A Scenario Analysis

Abstract

In the evolving debate and analysis of global imbalances, a commonly overlooked issue pertains to rising protectionism. This paper attempts to fill that gap, examining the macroeconomic implications of trade policy changes through the lens of a dynamic general equilibrium model of the world economy encompassing four regional blocs. Simulation exercises are carried out to consider the imposition of uniform and discriminatory tariffs on trading partners as well as the case of tariff retaliation. We also discuss a scenario in which a 'globalization backlash' lowers the degree of competition in import-competing sectors, and compare the implications of higher markups in the product and labor markets.

Keywords: Current account deficit, multi-country DGE models, net asset positions, trade policy

JEL Classification: E66, F32, F47