A new trade network theory: What economists can learn from engineers

This paper introduces a new trade model type combining the gravity model used by economists and network analysis methods used by electrical engineers. The new model type contributes to the trade network literature by enabling the description of complex dynamic processes, such as the propagation, overlap and cancellation of shocks and business cycles. This opens many possibilities for future policy applications with disaggregated model regions and sectors. The paper furthermore contributes to trade theory by deriving a straightforward rule for the optimal tariff respectively trade barrier. Calibrating the model to the World Input-Output Database (WIOD), the optimal trans-Pacific trade barrier between North America and Asia is estimated to be one third of the current trade barrier. The analysis identifies strong repercussions on global trade caused by increased trans-Pacific trade.