Economic Memos provide insight into the analysis work being performed by Danmarks Nationalbank’s employees. For example, Economic Memos contain background analyses and method descriptions. Economic Memos are primarily targeted at people who already have a knowledge of economic and financial analyses.
Global value chains and tariffs: Insights from theory and model-based analysis
Changing trade patterns, higher tariffs and increased geoeconomic fragmentation are increasingly shaping the global economy. It is important for Danmarks Nationalbank to have the tools to analyse and assess the consequences of these trends to ensure a robust Danish economy. This memo presents insights from theoretical trade literature and reviews the mechanisms captured by an advanced general equilibrium model used by Danmarks Nationalbank.
Key messages
Why is it important?
How should changes in trade barriers, increased tariffs and the impact of global value chains be understood and analysed? The economic literature on international trade has long addressed with these questions. In light of growing signs of geoeconomic fragmentation, recent US tariff increases, and shifts in global trade patterns, these issues have once again become key to assessing both the global and Danish economies, and thus to Danmarks Nationalbank.
"For decades, globalisation and increased global trade have been taken for granted. But now we face an increasingly polarised world."
— Christian Kettel Thomsen,
Governor of Danmarks Nationalbank
Main chart
Adjustments in a trade model following a tariff shock
Note:
A simplified illustration of the adjustments following a tariff shock in both the tariff-imposed and the tariff-exposed country in an advanced static general equilibrium model developed by Baqaee and Farhi, which is used by Danmarks Nationalbank, among others.
Source:
Baqaee and Farhi (2024) and own illustration.