Global Merchandise Trade Reform: Comparing results with the LINKAGE Model

This paper summarizes the key findings from simulating the full removal of all remaining trade barriers and domestic support using the World Bank’s global trade model, known as LINKAGE. In its default configuration, the Linkage model is dynamic recursive with the measured gains assessed in 2015 relative to a baseline for the global economy. The gains from this scenario are substantial, particularly for developing countries. The scenario also highlights the importance of agriculture as a source of the gains— for both developed and developing countries—and the importance of developing country reform as a source of their own gains. A second part of the paper looks at some of the key underlying assumptions of the standard LINKAGE model. First, the paper shows the relative importance of using a dynamic framework as opposed to a simple comparative static framework. Second, the paper shows how the trade reform results are impacted by changes in specific assumptions—the level of the trade elasticities, known to be important in assessing trade reform, the role of land supply—both its relative mobility across sectors and its aggregate responsiveness to changes in its underlying rental value—, and labor market closure—fixed versus flexible wages. There is no doubt that the aggregate income results are sensitive to these underlying assumptions. However, conclusions regarding the structural impacts are more robust, and they also tend to be much greater than the average income impact.