IGI | Inside Global Issues
Policy Brief No. 201613
The 2008 Financial Crisis and the Lack of Retaliatory Trade Intervention
The 2008 financial crisis did not precipitate global retaliatory trade intervention, in seeming contrast to the Great Depression in 1930s. This paper discusses the influence of model structure in optimal tariff (OT) calculations in explaining this puzzle. We emphasize how earlier literature reports high optimal tariffs in numerical calculation (of a hundred of percent) but only uses simple trade models. We use numerical general equilibrium calibration and simulation methodology to calculate optimal tariffs both with and without retaliation in a series of observationally equivalent models, and explore the influence of model structures on optimal tariff levels. We gradually add more realistic features into basic general equilibrium model, and show sharply decline optimal tariffs, which suggests that trade retaliation incentives effectively disappear with the deepening of globalization in 2008 compared to 1930. Switching from an Armington model treatment to a homogenous goods model has large negative impacts on optimal tariffs. Model structures incorporating foreign ownership of capital, changing from a balanced trade structure to a monetary imbalance structure also have sharply negative impacts on optimal tariffs. Incorporating production in a pure exchange model, and moving from balanced trade model to an exogenous fixed imbalance trade model also have comparatively smaller impacts on optimal tariffs, as do incorporating trade costs.
Keywords: Optimal Tariffs, General Equilibrium, Model Structure, Trade Liberalization
2. Literature Review
3. GE Models, Data, Calibration and Calculation of Optimal Tariffs
4. Optimal Tariffs Computational Results