Large-scale multinational shocks and international trade: a non-zero-sum game

Abstract

International trade has improved living standards but has also become a major channel for spreading shocks on a global scale. The increasing relevance of intersectoral linkages and trade in intermediates renewed interest in input–output techniques. This paper enriches the literature on empirical trade models with an input–output/econometric approach including substitution effects and price spillovers. Our model shows that (a) trade elasticities and bilateral shares are not constant in time and differ across sectors and countries; (b) international price changes alter the relative competitiveness between competitors; (c) final demand components such as consumption and investment react to changes in international prices. Large multi-country shocks produce feedback effects in national economies as they adapt by import substitution across exporters, by changing the import content of domestic production and by adjusting final demand. These feedbacks affect the global demand producing an asymmetric non-zero-sum game.