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1. What if? The Effects of a Hard Decoupling from China on the German Economy

Author:
Julian Baqaee, Julian Hinz, Benjamin Moll, Moritz Schularick, Feodora A. Teti, Joschka Wanner, and Sihwan Yang
Publication Date:
01-2024
Content Type:
Policy Brief
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
How would the German economy cope with a hard economic decoupling from China? The authors study a scenario where the global economy fragments into three distinct blocs: the G7 economies and their allies, China and her allies, as well as neutral countries. German trade with China would have to be entirely rerouted to countries within the "Western" block and neutral countries. The authors quantify the costs of such a worst-case hard decoupling using the (Baqaee and Farhi 2021) multi-sector model of the world economy. The key finding is that a total cut-off of trade relations with China would have severe but not devastating effects on the German economy. The welfare loss for Germany (relative to a no-cut-off baseline) would be around 5 percent of Gross National Expenditure (GNE) over the first few months and around 4 percent over the first year, plus additional short run costs due to business-cycle amplification effects. In the medium and long run, the costs would fall to a permanent loss in the 1–2 percent range. Less extreme decoupling or gradual de-risking scenarios (“small yard, high fence") would incur smaller costs. The single most influential assumption relates to the “trade elasticity,", i.e., the ease and speed with which trade can be reorganized away from China to neutral countries and within the “Western” block. The authors´ findings, in particular the critical dependence of economic costs on the time horizon over which adjustments take place, provide some rationale for embarking on a gradual de-risking trajectory to avoid a costly and politically contentious hard decoupling dictated by geopolitical events.
Topic:
Globalization, International Trade and Finance, Sanctions, Geoeconomics, Decoupling, and De-Risking
Political Geography:
China, Asia, and Germany

2. New Trade Models, Same Old Emissions?

Author:
Robin Sogalla, Joschka Wanner, and Yuta Watabe
Publication Date:
04-2024
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
This paper investigates the elusive role of productivity heterogeneity in new trade models in the trade and environment nexus. We contrast the Eaton-Kortum and the Melitz models with firm heterogeneity to the Armington and Krugman models without heterogeneity. We show that if firms have a constant emission share in terms of sales — as they do in a wide range of trade and environment models — the three models’ emission predictions exactly coincide. Conversely, if firms have a constant emission intensity per quantity — a prominent alternative in the literature — the emission equivalence between the three models breaks. We provide a generalization that nests both constant emission shares in sales and constant quantity emission intensities as special cases. We calibrate the models to global production and trade data and use German firm-level data to estimate the key elasticity of how emission intensity changes with productivity. Our multi-industry quantification demonstrates that the role of firm heterogeneity depends both on the model and the estimated parameters. Moving from the Armington model to the EK model increases the emissions effect on trade, while moving from the Krugman model to the Melitz model decreases the emission effects on trade.
Topic:
Climate Change, Globalization, International Trade and Finance, Carbon Emissions, and Sustainable Development
Political Geography:
Global Focus

3. Brothers in arms: The value of coalitions in sanctions regimes

Author:
Sonali Chowdhry, Julian Hinz, Katrin Kamin, and Joschka Wanner
Publication Date:
10-2022
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
This paper examines the impact of coalitions on the economic costs of the 2012 Iran and 2014 Russia sanctions. By estimating and simulating a quantitative general equilibrium trade model under different coalition set-ups, we (i) dissect welfare losses for sanction-senders and target; (ii) compare prospective coalition partners and; (iii) provide bounds for the sanctions potential — the maximum welfare change attainable — when sanctions are scaled vertically, i.e. across sectors up to an embargo, or horizontally, i.e. across countries up to a global regime. To gauge the significance of simulation outcomes, we implement a Bayesian bootstrap procedure that generates confidence bands. We find that the implemented measures against Iran and Russia inflicted considerable economic harm, yielding 32 – 37% of the vertical sanctions potential. Our key finding is that coalitions lower the average welfare loss incurred from sanctions relative to unilateral implementation. They also increase the welfare loss imposed on Iran and Russia. Adding China to the coalition further amplifies the welfare loss by 79% for Iran and 22% for Russia. Finally, we quantify transfers that would equalize losses across coalition members. These hypothetical transfers can be seen as a sanctions-equivalent of NATO spending goals and provide a measure of the relative burden borne by coalition countries.
Topic:
Globalization, International Trade and Finance, Markets, Sanctions, Alliance, and Embargo
Political Geography:
Russia, China, Europe, Asia, North America, and United States of America