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Cutting Through the Value Chain: The Long-run Effects of Decoupling the East from the West

Author

Listed:
  • Gabriel Felbermayr

    (WIFO)

  • Hendrik Mahlkow
  • Alexander Sandkamp
Abstract
With ever-increasing political tensions between China and Russia on one side and the EU and the USA on the other, it only seems a matter of time until protectionist policies cause a decoupling of global value chains. This paper uses a computable general equilibrium trade model calibrated with the latest version of the GTAP database to simulate the effect of doubling non-tariff barriers – both unilateral and reciprocal – between the two blocks on trade and welfare. Imposing trade barriers almost completely eliminates bilateral imports. In addition, changes in price levels lead to higher imports and lower exports of the imposing country group from and to the rest of the world. The targeted country group increases exports to the rest of the world and reduces imports. Welfare falls in all countries involved, suggesting that governments should strive to cooperate rather than turning away from each other. By imposing a trade war on Russia, the political West could inflict severe damage on the Russian economy because of the latter's smaller relative size.

Suggested Citation

  • Gabriel Felbermayr & Hendrik Mahlkow & Alexander Sandkamp, 2022. "Cutting Through the Value Chain: The Long-run Effects of Decoupling the East from the West," WIFO Working Papers 644, WIFO.
    • Handle: RePEc:wfo:wpaper:y:2022:i:644
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    More about this item

    Keywords

    Trade; non-tariff barriers; global value chains; quantitative trade model; China; Russia; European Union;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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