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One consequence of melting Arctic ice caps is the commercial viability of the Northern Sea Route, connecting East Asia with Europe. This represents a sizeable reduction in shipping distances and average transportation days compared to the conventional Southern Sea Route. We examine the economic impact of opening this route in a multi-sector Eaton-Kortum model with intermediate linkages. We find remarkable shifts in trade flows between Asia and Europe, diversion of trade within Europe, heavy shipping traffic in the Arctic and a substantial drop in Suez traffic. Projected shifts in trade also imply substantial pressure on an already threatened Arctic ecosystem.

While the theory of economic policy offers a potential framework for thinking about the joint pursuit of economic objectives (EOs) and non-economic objectives (NEOs), over time the theory of economic policy was formalized in a way that considers NEOs as constraints that are given, rather than as goals that may themselves be endogenous alongside EOs. We examine the analytical treatment of NEOs as co-determined with EOs, revisiting some of the ground broken by Alan Winters in his analysis of NEOs. We review the place of NEOs in the theory of economic policy, discuss current practice in the representation of such objectives as exogenous constraints, and develop an argument for representation of NEOs as objectives in themselves.

Eastern enlargement of the EU is a central pillar in Europe's post-Cold War architecture. Keeping the eastern countries out seriously endangers their economic transition, and economic failure in the east could threaten peace and prosperity in western Europe. The perceived economic costs and benefits will dictate the enlargement's timing. There are four parts to the calculus -- the costs and the benefits in the east and in the west. Here we break new ground in estimating the economic benefits of enlargement for east and west using simulations in a global applied general equilibrium model. Our analysis includes a scenario in which joining the EU significantly reduces the risk premium on investment in the east -- with resulting huge benefits to the new entrants. We also review the existing literature on the EU budget costs and arrive at a surprisingly well-determined 'consensus' estimate, which we support with a new political economy analysis of the budget. The bottom line is unambiguous and strongly positive: enlargement is a very good deal for both the EU incumbents and the new members.

The paper develops a tractable way to incorporate the micro structure of dual models of international trade into a standard class of dynamic open-economy macro models. In the process, it develops the concept of a dynamic factor price equalization set and an integrated intertemporal equilibrium. A number of results are obtained concerning trade, growth, and income convergence. Countries with higher capital/labor ratios may stay wealthier over time, both in the transition and in the new steady state. Real shocks in one country will be transmitted to the other country through the factor markets and traded goods prices.

A substantial body of research has taken shape on trade in services since the mid-1980s. Much of this is inspired by the WTO and regional trade agreements. However, an increasing number of papers focus on the impacts of unilateral services sector liberalization. The literature touches on important linkages between trade and FDI in services and the general pattern of productivity growth and economic development. This paper surveys the literature on services trade, focusing on contributions that investigate the determinants of international trade and investment in services, the potential gains from greater trade, and efforts to cooperate to achieve such liberalization through trade agreements. There is increasing evidence that services liberalization is a major potential source of gains in economic performance, including productivity in manufacturing and the coordination of activities both between and within firms. The performance of service sectors, and thus services policies, may also be an important determinant of trade volumes, the distributional effects of trade, and overall patterns of economic growth and development. At the same time, services trade is also a source of increasing political unease about the impacts of globalization on labor markets, linked to worries about offshoring and the potential pressure this places on wages in high income countries.

Contents -- I. INTRODUCTION -- II. BASIC TWO-SECTOR MODEL -- III. INTEGRATED INTERTEMPORAL EQUILIBRIUM -- IV. OUTSIDE THE DYNAMIC FPE SET -- V. CONCLUSIONS -- REFERENCES

This CEPS book comprises a first-ever economic and regulatory analysis of a possible Free Trade Area (FTA) between China and the EU, whose design is supposed to be 'deep and comprehensive'. It provides an overview of the global economic environment in which EU-Chinese economic relations have developed in recent years, including global value chains linking the two economies. The substance of the FTA design is then elaborated in nine, largely empirical and technical chapters ranging from tariff analysis (at the 6- and 8-digit level) and technical barriers to trade, to services, government procurement and investment. A third part comprises a CGE-model-based empirical simulation of the economic effects on GDP per member state (and on China), bilateral trade in goods and services, wages for workers with three distinct skill-levels and a series of goods and services sectors. The year-long study was led by Jacques Pelkmans of CEPS, and the research was carried out by a team of trade specialists at CEPS in partnership with another team of researchers led by Prof. Joseph Francois of the World Trade Institute (WTI) in Bern.

Working with a mix of panel data on goods and services trade for the OECD for 1994–2004, combined with social accounts data (i.e. data on intermediate linkages) for 78 countries benchmarked to the panel midpoint, we examine the role of services as inputs in manufacturing, with a particular focus on indirect exports of services through merchandise exports, and also on the related interaction between service sector openness and the overall pattern of manufacturing exports. From the cross-section, we also develop a set of stylized facts linking services to the level of development and the density of intermediate linkages. We find significant and strong positive effects from increased business service openness (i.e. greater levels of imports) on industries like machinery, motor vehicles, chemicals and electric equipment, supporting the notion that off-shoring of business services may promote the competitiveness of the most skill and technology intensive industries in the OECD. Conversely, we find evidence of negative general equilibrium effects for sectors that are less service intensive.

We develop a monopolistic competition model with non-homothetic factor input bundles where increasing quality requires increasing use of skilled workers. As a result more skill abundant countries export higher quality, higher priced goods. Using a multi-country dataset, we test and confirm the findings in Schott (2004) of a positive effect of skill abundance on unit values identified with US data. We extend the core model with per unit trade costs leading to the Washington apples effect that goods shipped over larger distance are of higher quality. The combination of high-quality goods being relatively skill intensive with the Washington apples effect implies that countries at a larger distance from their trading partners display a higher skill premium. Simulating our model, we find that a doubling of distance of a country relative to all its trading partners raises the skill premium in a country by about 1.6%. Les auteurs développent un modèle de concurrence monopolistique avec des ensembles d'intrants non homothétiques où une qualité accrue réclame l'utilisation accrue de travailleurs qualifiés. En conséquence, les pays où relativement abondent les travailleurs qualifiés exportent des produits de plus haute qualité et à prix plus élevés. À l'aide de données pour plusieurs pays, on met au test et on confirme les résultats de Schott (2004) – pour des données américaines – à l'effet que l'abondance de qualifications dans un pays a un effet positif sur la valeur ajoutée. On applique son modèle à des données pour plusieurs pays. On modifie le cœur du modèle en utilisant les coûts du commerce par unité de commerce ce qui débouche sur l'effet des pommes de Washington à savoir que les produits transportés sur de plus grandes distances sont de plus haute qualité. La combinaison de ces deux forces (le fait que les produits de plus haute qualité réclament plus de travail qualifié, et l'effet des pommes de Washington) suggère que les pays à plus grande distance de leurs partenaires commerciaux jouissent d'une prime au travail qualifié. Les simulations du modèle révèlent qu'un doublement de la distance entre un pays par rapport à tous ses partenaires commerciaux voudrait dire un accroissement de la prime au travail qualifié de ce pays de l'ordre de 1.6%

Division of labour models have become a standard analytical tool, along with competitive general equilibrium models (Ricardian, HOS, Ricardo-Viner), in public finance, trade, growth, development and macroeconomics. Yet unlike the earlier models, these models lack a canonical graphical representation. This is because they are both new and complex, characterised by multiple equilibria, instability and emergent structural properties under parameter transformation. We develop a general framework for such models, illustrating results from current research on specialisation models, and explaining why one sub-class of these models is particularly difficult to illustrate.