METRO: The OECD Trade Model

trade policy brief

METRO: The OECD’s Trade Model

November 2018

ETRO is a CGE model that uses data to explore the economic impact of changes in policy, M technology and other factors.

The model currently includes 61 economies across 57 economic sectors, and uniquely incorporates OECD statistical developments, including the TiVA database and the STRI. With METRO, it is now possible to track trade flows by their use and by the bilateral linkages between source and destination markets.

What is METRO? In 2015, the OECD launched a new global computable general equilibrium (CGE) trade model, known as METRO (ModElling TRade at the OECD). CGE models are computer simulation models that use data to explore the economic impact of changes in policy, technology and other factors.

They show how different sectors inside one economy are linked, how multiple economies are connected to each other, and how resources such as labour, capital and natural resources are allocated across all economic activities.

The METRO model builds on the GTAP (Global Trade Analysis Project) database. It currently includes 61 economies across 57 economic sectors, and uniquely incorporates OECD statistical developments, including the Trade in Value-Added (TiVA) database and the Services Trade Restrictiveness Index (STRI). METRO also features an extensive library of trade-related policies, including current border tariff rates, export restrictions, as well as domestic taxes and support.

How is it being used?

With METRO, it is now possible to track trade flows by their use (i.e. intermediate, household, government and investment) and by the bilateral linkages between source and destination markets. This innovation greatly enhances the ability of analysts to model movements of goods and services, especially along global value chains.

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Analysts can use METRO to trace how a given policy can affect prices, production and employment by sector and across countries. Identifying important indirect and flow-on effects through these linkages is a crucial part of assessing the net impacts of a policy change on economic growth and jobs.

At the OECD, the model has been used for a number of recent analytical reports. For example, METRO was used to highlight the impact that local content requirements have on intermediate inputs and the development of global value chains. It showed, for instance, that countries are in fact worse off when they impose export restrictions on their own steel and steel-related raw materials, due to the ensuing effects across critical supply chains. METRO was also used to explore how preferential trade agreements could contribute to growth and employment. It showed that positive effects are higher when more countries participate in trade integration. Firms and workers in smaller economies especially benefit as they can better specialise in international production networks.

More recently, the OECD has examined several alternative international market scenarios using the METRO model for a “Trade Policy and the Global Economy” series of short reports. In a first “market closing” scenario, tariffs were increased by a trade-weighted average to 25% in six sectors across a number of important trading countries; while a second “market opening” scenario reduced all

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METRO: The OECD’s Trade Model tariffs to the lowest level applied across G20 economies.

Outcomes from these two scenarios illustrate well the relative trade-offs from the two policy approaches: placing tariffs on as little as 7% of global trade would reduce that trade by 1.5%, while implementing even small tariff reductions would lead to an increase in global trade of twice that size. Ongoing work at the OECD using METRO aims to further quantify the expected impact of more efficient behind-the-border measures and barriers to services trade.

OECD has also used the METRO model to look at possible trade-related impacts following the United Kingdom’s planned departure from the European Union, in particular as related to impacts on trade with Ireland and the Netherlands. Given the high uncertainty regarding the final Brexit deal between the EU and the UK, the analysis assumed a worst case outcome with trade relations governed by World Trade Organization using most favoured nation rules. This complex scenario was constructed in METRO with tariff rates and nontariff measures applied at the product level, and aimed to provide a robust evidence base to help inform governments making decisions about trade policy.

Further reading • Metro Model Documentation, http://oe.cd/metrodoc • OECD (2018), “Trade Policy and the Global Economy: Reducing Tariffs”, https://issuu.com/oecd.publishing/docs/oecdtrade-scenario-1-reducing-tari • OECD (2018), “Trade Policy and the Global Economy: Increasing Tariffs”, https://issuu.com/oecd.publishing/docs/oecdtrade-scenario-2-increasing_ta • OECD (2018), OECD Economic Surveys: Netherlands 2018, OECD Publishing, Paris, https://doi.org/10.1787/eco_surveys-nld-2018-en • OECD (2018), “Market Opening, Growth and Employment”, OECD Trade Policy Papers, No. 214, OECD Publishing, Paris, https://doi.org/10.1787/8a34ce38-en • Arriola, C., et al. (2018), “The Potential Macroeconomic and Sectoral Consequences of Brexit on Ireland”, OECD Economics Department Working Papers, No. 1508, OECD Publishing, Paris, https://doi.org/10.1787/e930967b-en • Stone, S., J. Messent and D. Flaig (2015), “Emerging Policy Issues: Localisation Barriers to Trade”, OECD Trade Policy Papers, No. 180, OECD Publishing, Paris, https://doi.org/10.1787/5js1m6v5qd5j-en

www.oecd.org/trade

tad.contact@oecd.org

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