What is the international trade model?

The OECD’s trade model, METRO, is a computable general equilibrium (CGE) model that uses data to explore the economic impact of changes in policy, technology and other factors. CGE models are powerful tools that show how different sectors are linked, both within and between economies. As such, METRO tracks the myriad ways multiple economies are connected, how production and trade are linked in global value chains and how resources such as labour, capital and natural resources are best allocated across all economic activities.

Currently, the METRO database covers 64 economies across 65 economic sectors. It relies on the Global Trade Analysis Project (GTAP) database, and uniquely incorporates recent OECD statistical developments in non-tariff measures, services trade and trade in value added. For example, METRO allows users to analyse global value chains by drawing on the OECD Trade in Value Added (TiVA) database, providing a platform to more fully integrate structural policy issues in the analysis of trade policy.

METRO also features an extensive library of trade-related policies, including current border tariff rates, non-tariff measures, export restrictions, domestic taxes and support programmes. Using METRO, it is possible to track trade flows by their use (i.e. intermediate, household, government, and investment) in addition to the bilateral links between source and destination markets. This innovation greatly enhances the ability to model movements of goods and services, especially along global value chains.

OECD analysts are using METRO to trace how a given policy can affect outcomes such as 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 growth and jobs.

The model has already been used in a variety of topical analyses, including to highlight the impact that local content requirements have on intermediate inputs and the development of GVCs. 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. It was also used for analysing economic effects of the exit of the UK from the European Union; and most recently, to show that trade protection has a limited role to play in lowering global current account imbalances.

The model is available under a Creative Commons license and free; review the METRO Model Documentation for a detailed description of the model. Documentation is also available for an alternative land allocation representation and TiVA indicators calculated within the METRO model.

Trade scenario analysis using the OECD Metro Model

The OECD METRO model has been most recently used to explore a series of illustrative policy-change scenarios designed to examine both long standing and recently emerged issues in the trade policy debate. Drawing upon analysis from the OECD METRO Model, these briefs address:

Analysing the costs and benefits of global value chains

The economic effects of the COVID-19 pandemic have contributed to renewed discussions on the benefits and costs of global value chains (GVCs), and in particular on whether GVCs increase risks and vulnerabilities to shocks. To serve as a starting point for an informed conversation around these questions, this note presents the results of a set of economic model simulations, using the OECD’s trade model, METRO. We explore two stylised versions of the global economy, one with production fragmentation in GVCs, much as we see today, and another where production is more localised and businesses and consumers rely less on foreign suppliers.

• Shocks, risks and global value chains: insights from the OECD METRO model

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The Heckscher-Ohlin model is an economic theory that proposes that countries export what they can most efficiently and plentifully produce. Also referred to as the H-O model or 2x2x2 model, it's used to evaluate trade and, more specifically, the equilibrium of trade between two countries that have varying specialties and natural resources.

The model emphasizes the export of goods requiring factors of production that a country has in abundance. It also emphasizes the import of goods that a nation cannot produce as efficiently. It takes the position that countries should ideally export materials and resources of which they have an excess, while proportionately importing those resources they need.

Here is some important information regarding the Heckscher-Ohlin model.

• The Heckscher-Ohlin model evaluates the equilibrium of trade between two countries that have varying specialties and natural resources.
• The model explains how a nation should operate and trade when resources are imbalanced throughout the world.
• The model isn't limited to commodities, but also incorporates other production factors such as labor.

The primary work behind the Heckscher-Ohlin model was a 1919 Swedish paper written by Eli Heckscher at the Stockholm School of Economics. His student, Bertil Ohlin, added to it in 1933. Economist Paul Samuelson expanded the original model through articles written in 1949 and 1953. Some refer to it as the Heckscher-Ohlin-Samuelson model for this reason.

The Heckscher-Ohlin model explains mathematically how a country should operate and trade when resources are imbalanced throughout the world. It pinpoints a preferred balance between two countries, each with its resources.

The model isn't limited to tradable commodities. It also incorporates other production factors such as labor. The costs of labor vary from one nation to another, so countries with cheap labor forces should focus primarily on producing labor-intensive goods, according to the model.

Although the Heckscher-Ohlin model appears reasonable, most economists have had difficulty finding evidence to support it. A variety of other models have been used to explain why industrialized and developed countries traditionally lean toward trading with one another and rely less heavily on trade with developing markets.

The Linder hypothesis outlines and explains this theory. It states that countries with similar incomes require similarly valued products and that this leads them to trade with each other.

Certain countries have extensive oil reserves but have very little iron ore. Meanwhile, other countries can easily access and store precious metals, but they have little in the way of agriculture.

For example, the Netherlands exported almost $577 million in U.S. dollars in 2019, compared to imports that year of approximately $515 million. Its top import-export partner was Germany. Importing on a close to equal basis allowed it to more efficiently and economically manufacture and provide its exports.

The model emphasizes the benefits of international trade and the global benefits to everyone when each country puts the most effort into exporting resources that are domestically naturally abundant. All countries benefit when they import the resources they naturally lack. Because a nation does not have to rely solely on internal markets, it can take advantage of elastic demand. The cost of labor increases and marginal productivity declines as more countries and emerging markets develop. Trading internationally allows countries to adjust to capital-intensive goods production, which would not be possible if each country only sold goods internally.