TSPQ – Trade shocks and product quality

Since 2018, the United Kingdom and United States of America have been contemplating restrictive trade policies. In 2020, the COVID-19 lockdown hit the world economy. In this project, the researchers aim at quantifying the outcomes of those three shocks using a general equilibrium model with domestic sectoral linkages, trade in intermediate goods and sectoral heterogeneity in production. Our key contribution lies in controlling for product quality in the welfare analysis. An important novelty is that the quality will have both horizontal and vertical dimensions. Their framework will also include labour mobility restrictions in US and UK protectionist policies and in the COVID-19 lockdown. On one hand, they will analyse the outcomes of COVID-19 shock. The restrictions should have direct impact via drop in production of sectors under lockdown, and indirectly via input shrinkage. The researchers will ex-post evaluate the welfare outcomes by running a series of counterfactual simulations according to countries’ lockdown policies. Additionally, they will run counterfactuals for COVID-related labour mobility restrictions. On the other hand, they will ex-post evaluate the welfare outcomes of Brexit and new U.S. trade policy. The researchers will discuss counterfactual simulations of rise in trade tariffs. Importantly, we will derive theoretically-based measures of quality and estimate the impact of trade shocks. We will compare with literature-based measures of quality and quality standards. For each of the studied shocks, we will discuss the impact on Luxembourg’s finance, steel and logistic sectors and the results for welfare and consumers’ well-being in Luxembourg.