Modelling Trade Diversion Effects of Trade Agreements: A General Equilibrium Analysis Using Structural Gravity Equations with Multilateral Resistance Terms

04 July 2025, Version 1
This content is an early or alternative research output and has not been peer-reviewed by Cambridge University Press at the time of posting.

Abstract

This paper examines structural features of trade diversion effects of significant trade pacts and policy shocks by making use of a structural gravity model in general equilibrium. Through the introduction of multilateral terms of resistance, analysis of partial equilibrium is transcended, such that the impact of ripples occurring on the global economy is reflected. Empirically quantifying the re-ordering of trade patterns, brought on by incidents such as Brexit, the study uses a panel dataset over the 2010-2024 period. Its results confirm serious trade diversion: since Brexit, a substantial decrease in UK-EU trade of the automotive industry and machinery occurred, with a simultaneous increase in UK-non-EU trade. The natural shift in Germany of the source of imports is explicitly identified with a steep decline in the UK and EU, and the rise of China and the United States being the respective sources. These findings highlight how imperative it is to ensure supporting adaptive policy regimes, nimble renegotiation of trades, and investments in supply chain resilience in the dynamic and networked world of current international trade.

Keywords

Trade Diversion
Structural Gravity Model
Multilateral Resistance
Brexit
General Equilibrium Analysis
Trade Agreements
International Trade Policy

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