Booth Research Looks at Post-Recession Trade War Scenarios

New research from the Booth School of Business lays out a framework to see what would have happened if a trade war had broken out after the Great Recession. In his upcoming paper to be published in American Economic Review, “Trade Wars and Trade Talk with Data“, Professor Ralph Ossa looks at three scenarios— tariffs that would be levied if there were no fear of retaliation; retaliatory tariffs in a worldwide trade war; and tariffs that are negotiated cooperatively.

Ossa’s research found that we have already reaped most of the possible gains with tariff negotiation and that tariffs are relatively low. His research compares the worst-case scenario of all-out trade war and the best-case scenario of perfectly smooth negotiations. What remain are politically sensitive industries and non-tariff barriers, like regulations. The difficulty is reaching regulatory agreement among the 160 members of the World Trade Organization, or WTO.

Non-tariff barriers create opportunities for negotiation. “Now one thing you could achieve with such a trade agreement, for example, is to mutually recognize your standards,” Ossa said.

According to Ossa, there are two interpretations of the paper: Either that the framework is a maintained hypothesis or a tested hypothesis. “In the former case, they can be viewed as answers to questions of immediate policy relevance. … In the latter case, they can be interpreted as suggestive of the plausibility of some of the leading models of trade policymaking.”

He adds:

“Basically no one has made these calculations before, no one has taken the basic models of trade policy and tried to work out what the quantitative predictions are — if you calculated what the trade war would look like, what the ideal trade negotiations would look like if you worked it out.”

regions: Chicago

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