Trade Network Reconstruction and Simulation with Changes in Trade Policy

TL;DR

This paper introduces a new entropy-based model for reconstructing international trade networks from local trade data and simulates the impact of trade policy changes on trade flows, revealing significant shifts in import and export patterns.

Contribution

The paper presents a novel entropy-maximization model for trade network reconstruction and demonstrates its application in simulating trade policy impacts on global trade flows.

Findings

Halving import costs increases U.S. to Japan FOOD imports.

Doubling export costs decreases Japan's exports to the U.S.

Trade policy changes significantly alter international trade patterns.

Abstract

The interdependent nature of the global economy has become stronger with increases in international trade and investment. We propose a new model to reconstruct the international trade network and associated cost network by maximizing entropy based on local information about inward and outward trade. We show that the trade network can be successfully reconstructed using the proposed model. In addition to this reconstruction, we simulated structural changes in the international trade network caused by changing trade tariffs in the context of the government's trade policy. The simulation for the FOOD category shows that import of FOOD from the U.S. to Japan increase drastically by halving the import cost. Meanwhile, the simulation for the MACHINERY category shows that exports from Japan to the U.S. decrease drastically by doubling the export cost, while exports to the EU increased.