Quantitative Trade Models: Developments and Challenges

Applied general equilibrium (AGE) models, which feature multiple countries, multiple industries, and input-output linkages across industries in a Walrasian general equilibrium framework, have been the dominant tool for evaluating the impact of trade liberalization since the 1980s. We review and document shortcomings in the performance of AGE models in predicting the effects of past trade reforms across industries. We argue that to improve their performance in predicting the impact of trade reforms, existing models need to incorporate micro data on bilateral trade relations by industry and to better model how trade reforms lower bilateral trade costs. We use the least-traded-products methodology of Kehoe, Ruhl, and Rossbach (2015) to provide a guide on how improvements can be made.