Are Economic Models Fit for New Realities in Global Trade?

From politically motivated US tariffs to the EU’s Carbon Border Adjustment Mechanism (CBAM) to China’s subsidy policies: rather than globalisation and cooperation, international trade is increasingly dominated by trade barriers and conflicts, the reshoring of supply chains and industrial nationalism. The well-established quantitative modelling tools relied upon by policymakers when assessing climate and trade policy options were predominantly developed and tested against a backdrop of increasing globalisation and the ongoing dismantling of trade barriers. But are these tools just as reliably in a reversed scenario? Or do we need new or refined models to measure and assess the changed economic reality and its consequences?

In the perspective paper "Trade, protectionism, and climate: Assessing analytical capacity in a changing policy landscape", now published in the journal iScience, ten researchers led by Paola Rocchi from the European Institute on Economics and the Environment (EIEE) address precisely this question.
Dr. Lukas Hermwille, Co-Head of the Transformative Industrial Policy Research Unit at the Wuppertal Institute and co-author of the paper, explains the underlying assumption: "Protectionism and industrial policy nationalism are not simply a reversal of trade liberalisation. Economic mechanisms that have long driven productivity gains – such as economies of scale and technological learning effects – cannot simply be rolled back symmetrically. Whilst trade liberalisation takes years to build up capacities, protectionism can, under certain circumstances, render them obsolete overnight." The long-term structural effects could have wide-ranging consequences, including for climate protection: for instance, trade barriers and conflicts can impede the international transfer of low-carbon technologies, whilst restricted market access can result in the fragmentation of global green-tech production – thereby undermining the economies of scale required to reduce the unit costs of green technologies.

In their paper, the researchers describe how global trade influences emissions – and demonstrate when and how different trade regimes can hinder or promote climate targets. On this basis, the researchers propose improvements to data integration, modelling approaches and scenario design – and suggest a research agenda to strengthen the analytical framework for assessing the climatic impacts of changing trade regimes.

The study was produced as part of the ENTICE project and is available to download free of charge via the link below.