ifo Center for International Economics

Trade Costs and Trade Policy

The global economic environment is characterized by increasing trade policy tensions. This is leading to a noticeable slowdown in world trade growth, which poses particular challenges for an open economy such as Germany’s. Since the conclusion of the Uruguay Round in 1995, there has been no significant reduction in WTO tariffs. This stalemate in multilateralism has been countered by many countries with an increased bilateralization of their free trade efforts, leading to a sharp rise in bilateral and regional free trade agreements since 2001. In this research strand, the Center examines the role of trade agreements for welfare and employment in the countries directly concerned and in third countries. Structurally estimated general equilibrium models are used. In due course, the Center also quantifies the potential costs of reintroducing trade barriers, for example in the wake of Brexit, imposing sanctions, or increasing tariffs. In these areas, the Center has recently completed studies for the BMWi and for the Düsseldorf Chamber of Industry and Commerce.

The Center has also created the world’s most comprehensive customs dataset, nearly doubling the number of available duties from 2.9 billion to 5.7 billion. The new dataset lists many new facts about customs duties.
To quantify the effects of tariffs and non-tariff barriers on welfare and on the labor market, the Center uses something called the gravity model, which – embedded in structurally estimated general equilibrium models – can be used for policy advice. Currently, the Center is working on further improvements to the ifo trade model for the modeling of income distribution in quantitative analyses.

Globalization and Labor Markets

The international mobility of companies and employees brings with it opportunities and risks for employment and the wage structure in Germany and Europe. Skepticism about globalization has increased in recent years. Surveys repeatedly show that people in Germany and Europe are concerned about the labor market effects of globalization and see social cohesion at risk.
In general, the Globalization and Labor Markets research strand looks at the labor market effects of international trade in goods and production decisions of multinational firms. It also evaluates the effects of trade policy and firm offshoring on the labor market. In addition, it examines how changes in product market competition are transmitted to labor markets and how the behavior of firms of different sizes moderates this transmission.

The Center is part of Collaborative Research Center 190 “Rationality and Competition,” funded by the German Research Foundation. The aim of the project is to investigate the effects of globalization on the labor market and on income distribution. For the analysis, the Center uses models of the new foreign trade theory, with which reallocation effects can also be studied within narrowly defined sectors. In addition, the project is dedicated to the theoretical and empirical modeling of the effect of international competition on economic inequality between and within firms.

Trade, Environmental Policy, and Pandemics

Pandemics, natural disasters, and the consequences of climate change could expose the world economy to an increasing number of unexpected shocks. The aim of this research strand is to contribute to a better understanding of the links between globalization and shocks such as climate change and pandemics.

In the course of the Covid-19 pandemic, global supply chains partially collapsed, raising doubts about the continued existence of the international division of labor. During the coronavirus crisis, the Center wrote numerous papers on the topic of supply chains and the impact of the pandemic on the German economy. Currently, the Center is working on extending the simulation model to quantify the welfare and distributional effects of the Covid 19 pandemic at the regional and sectoral levels. The analysis serves to better understand regional and sectoral distributional and welfare effects and clarifies which trading partners are most important for regions.

In addition, the Center investigates the role of trade policy in coping with the damage caused by climate change (e.g., by natural disasters). Currently, the Center is investigating the role of international trade in coping with the costs of climate change and has built up a large database for this purpose: ifo-GAME (Geological and Meteorological Events). These research activities are supported by the German Research Foundation within the framework of a project.

Another topic is carbon leakage and EU climate policy. In this research strand, the Center investigates the significance of international trade in goods for the effectiveness of climate policy. This topic is explored with the help of a simulation model. Specifically, the model can be used to answer the question of what effects the new climate policies have on climate change and carbon leakage. This can also be combined with trade policy scenarios (e.g., increasing protectionism and trade liberalization).

Globalization and Innovation

Past technological innovations often lowered trade costs and thus promoted international trade in goods and services. Current innovations, on the other hand, may tend to equalize production costs across countries, making cross-border trade according to the Ricardian model (comparative cost argument) less justified. However, automation and globalization are seen as a dynamic duo of economic change that will increasingly shape our society in the years to come.

In this research strand, the Center investigates the connection between innovation (automation in particular) and globalization. For example, it examines the influence of international competition on innovation decisions of companies.

Currently, the Center is involved in the EU-funded Horizon 2020 project “Pathways to Inclusive Labour Markets.” This project focuses on how automation and trade linkages have redefined production and labor markets in Latin American countries, and how the resulting production structure has contributed to widening inequalities in Latin America.

ifo Game – the Geological and Meteorological Events Database

ifo GAME collects information on geological and meteorological events like earthquakes, volcanic eruptions, storms, extreme temperature events, floods and droughts, and provides a unique dataset for economic analysis, as it contains variation that is presumably exogenous to economic outcomes. ifo GAME is part of the ifo research data available for download at the EBDC.

Prof. Dr. Peter Egger, ETH Zürich

Prof. Gabriel Felbermay, Ph.D., Österreichisches Institut für Wirtschaftsforschung

Prof. Wolfgang Keller, Ph.D.

Prof. Dr. Mario Larch

Prof. Dr. Wilhelm Kohler 

Prof. Devashish Mitra, Ph.D. 

Prof. Dr. Marc Andreas Mündler, University of California, San Diego

Prof. Yoto V. Yotov, Ph.D.

Michele Battisti, Ph.D., University of Glasgow

Dr. Martin Braml

Dr. Inga Heiland, Norwegian University of Science and Technology

Prof. Dr. Erdal Yalcin, Hochschule Konstanz

CESifo Area on Global Economy