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Working Papers
AI Meets Trade: Global Linkages and the Cross-country Distribution of the Gains from AI
This paper provides estimates of expected per capita real income gains from AI over the next decade in OECD and G20 economies. It relies on a multi-country, multi-sector general equilibrium […]
This paper provides estimates of expected per capita real income gains from AI over the next decade in OECD and G20 economies. It relies on a multi-country, multi-sector general equilibrium model to incorporate the role of international trade and considers different scenarios regarding AI adoption paths and AI capabilities. In our central scenario, AI-driven productivity gains vary widely across countries and are expected to raise per capita real income growth by 0.1–0.95 percentage points annually. The model’s dynamics reveal a key insight: while countries lagging in AI adoption can gain from cheaper, AI-intensive imports generated by global diffusion, maintaining competitiveness – especially in highly AI-exposed sectors – ultimately requires strong domestic AI adoption. As a further channel, the paper quantifies the welfare effects generated by international knowledge spillovers boosting AI adoption of countries with relatively lower AI adoption.
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Working Papers
Economic Costs of Friend-shoring
Geo-political tensions and disruptions to global value chains have led policymakers to reevaluate their approach to globalisation. Many countries are considering regionalisation and friend-shoring – trading primarily with countries sharing […]Geo-political tensions and disruptions to global value chains have led policymakers to reevaluate their approach to globalisation. Many countries are considering regionalisation and friend-shoring – trading primarily with countries sharing similar values – as a way of minimising exposure to weaponisation of trade and securing access to critical inputs. If followed through, this process has the potential to reverse global economic integration of recent decades. This paper estimates the economic costs of friend-shoring using a quantitative model incorporating inter-country inter-industry linkages. The results suggest that friend-shoring may lead to real GDP losses of up to 4.6% of global GDP. Thus, although friend-shoring may provide insurance against extreme disruptions and increase the security of supply of vital inputs, it would come at a significant cost. -
Book Chapter
Economic Costs of Friend-shoring
Geoeconomic Fragmentation: The Economic Risks from a Fractured World Economy, 29-38.
The nature of international trade has changed significantly since the early 1990s: the liberalisation of cross-border transactions, advances in information and communication technology, reductions in transport costs, and innovations in […]
The nature of international trade has changed significantly since the early 1990s: the liberalisation of cross-border transactions, advances in information and communication technology, reductions in transport costs, and innovations in logistics have given firms greater incentives to break up the production process and locate its various stages across many countries. As a result, global supply chains have become very common, accounting for around a half of global trade in 2020 (World Bank 2020).
The prevalence of global value chains has been underpinned by the well-functioning international trade rule enshrined in the General Agreement on Tariffs and Trade (GATT) and later the WTO, as well as regional agreements. However, geopolitical tensions and disruptions to global value chains – ranging from cyber-threats, the US-China trade war (Fajgelbaum et al. 2022), and the Russian invasion of Ukraine to systemic issues such as the Covid-19 pandemic and the climate crisis – have led policymakers to re-evaluate their approach to globalisation. Many countries are considering ‘friend-shoring’ – trading primarily with countries sharing similar values (such as democratic institutions or maintaining peace) – as a way of minimising exposure to weaponisation of trade and securing access to critical inputs, particularly those required for green transition (Arjona et al. 2023, Attinasi et al. 2023).
In contrast to optimisation under free trade, friend-shoring – by imposing constraints – is likely to be less efficient. But how high is the price that needs to be paid for the alleged insurance benefits brought about by friend-shoring? To shed some light on this question, this chapter assesses the economic costs of friend-shoring, with a focus on broadly defined emerging Europe and European neighbourhood economies. We make three main points. First, we show that, in the medium run, friend-shoring is bad for most economies and generally leads to real output losses globally. Second, only countries that manage to remain non-aligned may see real output gains, but these gains are much smaller than the losses incurred by other countries and not guaranteed. Third, economic costs of friend-shoring are higher than the economic costs of sanctions imposed on Russia after its invasion of Ukraine.
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Working Papers
On the Design of Effective Sanctions: The Case of Bans on Exports to Russia
We analyze the effects of bans on exports at the level of 5,000 products and show how our results can inform economic sanctions against Russia after its invasion of Ukraine. […]We analyze the effects of bans on exports at the level of 5,000 products and show how our results can inform economic sanctions against Russia after its invasion of Ukraine. We begin with characterizing export restrictions imposed by the EU and the US until mid May 2022. We then propose a theoretically-grounded criterion for targeting export bans at the 6-digit HS level. Our results show that the cost to Russia are highly convex in the market share of the sanctioning parties, i.e., there are large benefits from coordinating export bans among a broad coalition of countries. Applying our results to Russia, we find that sanctions imposed by the EU and the US are not systematically related to our arguments once we condition on Russia’s total imports of a product from participating countries. Quantitative evaluations of the export bans show (i) that they are very effective with the welfare loss typically ∼100 times larger for Russia than for the sanctioners. (ii) Improved coordination of the sanctions and targeting sanctions based on our criterion allows to increase the costs to Russia by about 60% with little to no extra cost to the sanctioners. (iii) There is scope for increasing the cost to Russia further by expanding the set of sanctioned products.
Wall Street Journal: Sanctions Against Russia Could Be Better, These Harvard Economists Say
Video summary: How can sanctions against Russia be more effective?
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Journal Articles
On the Design of Effective Sanctions: The Case of Bans on Exports to Russia
Economic Policy , 39, 109-153.
We build on Baqaee and Farhi (2019, 2021) and derive a theoretically-grounded criterion that allows targeting bans on exports to a sanctioned country at the level of ∼5000 6-digit HS […]
We build on Baqaee and Farhi (2019, 2021) and derive a theoretically-grounded criterion that allows targeting bans on exports to a sanctioned country at the level of ∼5000 6-digit HS products. The criterion implies that the costs to the sanctioned country are highly convex in the market share of the sanctioning parties. Hence, there are large benefits from coordinating export bans among a broad coalition of countries. Applying our results to Russia reveals that sanctions imposed by the EU and the US in response to Russia’s invasion of Ukraine are not systematically related to our arguments once we condition on Russia’s total imports of a product from participating countries. We discuss drivers of these differences, and then provide a quantitative evaluation of the export bans to show that (i) they are very effective with the welfare loss typically ∼100 times larger for Russia than for the sanctioners; (ii) improved coordination of the sanctions and targeting sanctions based on our criterion allows to increase the costs to Russia by about 80% with little to no extra cost to the sanctioners; and (iii) there is scope for increasing the cost to Russia further by expanding the set of sanctioned products.