Computable General Equilibrium Models of Trade in the Modern Trade Policy Debate

We set up two rival Computable General Equilibrium (CGE) models of world trade, one based on classical theories comparative advantage, the other recent gravity theories. have tested them by indirect inference time-series trade facts for four major countries or country blocs: UK, US, China and EU. The UK is a small enough economy rest world’s behaviour to be treated as exogenous, so we test model with this held constant; countries/blocs are large their ‘part model’ in which variables simulated reduced form VAR unknown true model. show Monte Carlo experiments that these tests high power. Our findings Gravity version rejected strongly cases, but passes two. By contrast Classical comfortably accepted all cases; our power experiment implies very likely close truth should therefore used policy analysis. message protection damaging welfare; includes customs union, where even though some members may gain, general welfare reduced.