Quantifying Economic Impacts of Trade Agreements with Heterogeneous Trade Elasticities

Abstract

Bilateral trade relationships between countries vary across products. Such heterogeneity poses challenges when assessing the economic impacts of trade agreements. This paper estimates bilateral trade elasticities at the product level and explores these impacts using a hypothetical no‐deal Brexit as an example. Our findings indicate that the European Union's demand for the United Kingdom products is often less elastic compared to products from other trading partners. We also observed substantial heterogeneity in the elasticities across products and a negative correlation between these elasticities and tariffs. These factors mitigate extent of trade welfare losses compared to a scenario using homogeneous elasticities.