Would protectionism defuse global imbalances and spur economic activity?: a scenario analysis

Abstract: In the evolving analysis of global imbalances, the possibility that countries will resort to increased protectionism is often mentioned but rarely analyzed. This paper attempts to fill that gap, examining the macroeconomic implications of a shift to protectionist policies through the lens of a dynamic general equilibrium model of the world economy that encompasses four regional blocs. Simulation exercises are carried out to assess the consequences of imposing uniform and discriminatory tariffs on trading partners as well as the consequences of tariff retaliation. We also discuss a scenario in which a ?globalization backlash? lowers the degree of competition in import-competing sectors, and compare the implications of higher markups in the product and labor markets.

Keywords: current account deficit; net asset positions; multicountry dynamic general equilibrium models; trade policy;

JEL Classification: F32; E66; F47;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2006

Number: 268

Pages: 59 pages

Note: For a published version of this report, see Hamid Faruqee, Douglas Laxton, Dirk Muir, and Paolo Pesenti, "Would Protectionism Defuse Global Imbalances and Spur Economic Activity? A Scenario Analysis," Journal of Economic Dynamics and Control 32, no. 8 (August 2008): 2651-89.