Annex 4 analytical methods

RunDynam is a recursively dynamic applied general equilibrium model of the world economy and is built upon the Social Accounting Matrices (SAMs) of individual countries and regions. This model extends the comparative static framework of the standard GTAP model developed by Hertel (1997)  to a dynamic framework by incorporating international capital mobility and capital accumulation, while preserving all the features of the standard GTAP, such as constant returns to production technology, perfectly competitive markets and product differentiation by countries of origin – the so-called Armington assumption. RunDynam allows constructing a baseline (which may be a forecast) and policy deviations from the baseline. Users can view the results of the base case or policy deviation on the screen or export them to other programs. The model allows to simulate trade measure change, like tariffs cuts, in order to analyze the possible trade creation and trade deviation.

RunDynam relies on the Global Trade Analysis Project (GTAP). GTAP is a global network of researchers and policy makers conducting quantitative analysis of international policy issues. GTAP's goal is to improve the quality of quantitative analysis of global economic issues within an economy-wide framework. The GTAP network provides a global data base describing bilateral trade patterns, production, consumption and intermediate use of commodities and services. The latest version of the database, V10, refers to 2014 as reference year and covers 141 regions and 65 sectors (https://www.jgea.org/resources/jgea/ojs/index.php/jgea/article/view/77).

The impact of a trade policy shock cannot be evaluated without a baseline i.e. the counterfactual situation in which the economy would have been should there have been no trade policy change. Creating a realistic baseline is as difficult as it is important. The Commission usually relies upon predictions about the future by others, such as short term projections on GDP growth from the IMF and longer term projections on e.g. population from the UN, but also on energy consumption, labour participation rates, etc.

Output comes in the form of results on a wide range of indicators such as: (i) GDP or welfare (equivalent variation); (ii) Impact by sector in terms of exports, imports, production and value added reflecting  inter -sectoral input -output links including sourcing of inputs (goods and services) from abroad; (iii) Impact on factors of production (land, capital and labour of various skill categories) in terms of e.g. wages and (iv) CO2 emissions, land use, etc.

CGE models, like RunDynam, are computer-based simulations which calculate the future state of the global economy (including any country or region specifically analysed) as a consequence of a specified set of (trade) policy changes.

RunDynam is used, among other models and other approaches, for the economic analysis (Impact Assessment) within the different steps of any EU trade policy initiative. A Commission Impact assessment (IA) is needed before major trade negotiations can begin and for all other significant trade policy proposal, a trade sustainability impact assessment (SIA) is carried out during negotiations process and finally the economic assessment of the negotiated outcome (EANO) focuses on the economic value of trade barrier reductions following the final, precise outcome of the negotiations. In all these steps, RunDynam could be used for the economic assessment.

Reference for EC Impact assessment can be found here: https://ec.europa.eu/trade/policy/countries-and-regions/negotiations-and-agreements/.

• Trade