Journal of International Economics 23 (1987) 179-199. North-Holland

BOOK REVIEWS

Alan V. Deardorff and Robert M. Stern, The Michigan Model of World Production and Trade (MIT Press, Cambridge, MA, 1986) pp. v+ 274, $30.00.

This volume by Alan Deardorff and Robert Stern presents a detailed description of the Michigan model of world trade, followed by a series of chapters outlining its application to a number of policy and other issues. The book is well written and performs the much needed task of pulling together a series of journal and conference papers into a single accessible volume. The model already has been widely acknowledged as a pioneering effort in the micro-based economy-wide modelling of trade issues. As such, the present volume will be warmly welcomed by other researchers in the policy and modelling fields as a convenient reference manual for one of the more important of the modelling efforts of recent years.

As a fellow modeller, I must confess to my own biases both as to orientation of the field itself, and as to the particular style of modelling one follows. Here, I will not belabour readers with my own views as to the importance of this type of work. Let it suffice to note that the attempt to bridge theory and application in the policy relevant framework embodied in the Michigan model echoes many of the themes that have been stressed elsewhere in the emerging literature on applied general equilibrium analysis. The strength of this kind of work lies in its incorporation of substantial amounts of detail into an underlying analytical framework, thereby providing an empirical basis for policy analysis. But the weaknesses are equally well known, including the absence of any statistical testing of the models, the crucial role played by key elasticities, and the dependence of conclusions on a particular model structure.

For readers not familiar with the Michigan Model, I will spell out a few of the details. There are 29 industries and 34 countries in the model. Partial equilibrium country sub-models are embedded in a world Keynesian macro structure. The model is solved by a linearization procedure in the spirit of the Johansen approach. Deardorff and Stem emphasize that while their model is in the spirit of a Walrasian general equilibrium analysis, there are important deviations from a pure application. In the country systems, for

0022-1996/87/%3.50 0 1987, Elsevier Science Publishers B.V. (North-Holland)

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instance, wages are assumed fixed, and in the most commonly used variant of the model, aggregate expenditures are also fixed by country. A further feature that has previously attracted attention in the literature is that nominal exchange rates enter the analysis and appear to have real effects.

The modellers’ underlying objective is to develop a usable multisectoral model for the analysis of micro impacts of trade shocks or policy changes. In their first two major chapters (pp. 19-47), they lay out in detail the structure of their model. Six applications chapters follows, including three that are in one way or another related to the analysis of changes in exchange rates.

Some examples of the results should serve to interest potential readers to delve more deeply into this book. In their first chapter of policy analysis Deardorff and Stern report results on the effects of reductions in tariffs and non-tariff barriers in the Tokyo Round. They point out that, like in other modelling efforts, the welfare effects of tariff reductions appear to be small. However, interestingly, they differ from some of the other recent modelling work in their findings regarding impacts on less developed countries. Other work suggests that a major effect of reductions in tariffs under the GATT is to expand global trade in manufactures and to inflict a terms of trade loss on those developing countries that are exporters of both primary products and raw materials. This effect appears not to come through in the Deardorff-Stern results.

Their results also indicate the changes that take place in employment when tariffs change. Interestingly, they show that one of the major effects is to increase textile employment, particularly in Belgium and France. This presumably reflects the major effect of reductions in tariffs on textiles trade between developed countries.

The effects of tariffs and exchange rates on the structure of protection are evaluated in the next chapter, and their third applications chapter looks at the effects of taxes and subsidies on trade. In this chapter a particularly important issue is the way that these taxes are modelled. Recent public finance literature (e.g. the work of King and Fullerton) emphasizes the importance of assessing the marginal effects of taxes. This literature, and also the recent analyses of the effects of tax treatment of foreign source income, which have emphasized such complexities as the foreign tax credit, are largely ignored here.

Two further chapters follow; one on uniform exchange rate changes and the other on non-uniform exchange rate changes. In the former chapter, the analysis focuses on a similar devaluation against all trading partners, whereas in the latter chapter different bilateral devaluations are considered.

In Chapter 9 the authors investigate the effects of trade on employment changes; that is, they solve their model for the change in employment given the change in trade. They focus on what the employment patterns would have been had trade not expanded between 1970 and 1976. Their conclusion

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is that trade is especially important in accounting for employment changes, a finding that contrasts with other recent work on the importance of trade as a source of adjustment pressure in various industrialized countries.

In the light of the presentation in this book, it is perhaps worth raising some issues as to what directions future work of this type should take. I will confine myself to two points. One concerns modelling structures, the other the orientation of modelling work.

As regards modelling structure, a question that repeatedly occurred to me in reading this book was how sensitive results are to various closure rules and non-traditional treatments within the structure. What role do exchange rates play in a real-side general equilibrium model in which nominal variables appear to have real-side effects? What are the implications of the departures from the traditional Arrow-Debreu-type analysis introduced by the assumptions of exogenous wage rates and/or real expenditures? Although the authors label their welfare analysis as tentative due to these and other features, it is important for them to address these issues more systematically in their future work.

As regards orientation, I would prefer to see further development of this model oriented toward policy analysis, perhaps focusing more on concrete policy options. Of the six applications chapters presented in the book, only one really evaluates a proposed policy change, and that is a change of historical rather than current significance (i.e. tariff and other changes in the Tokyo Round). Indeed, as I went through the book and thought about the model structure, what struck me was the relative lack of orientation in this modelling effort on the trade issues of the day. How models such as this one may be used to provide input into discussion of agricultural trade, trade in services, countervailing duties and subsidies, safeguards, intellectual property and other central issues in trade negotiations in the years ahead remains a challenge for these authors and other modellers.

These are, however, minor blemishes on the book and the gripes of someone who has also experienced the frustrations of modelling work. Ex post, one often feels that one could have structured or applied the model differently. But this is a splendid book, which I would strongly recommend to those interested in seeing how policy-relevant modelling work can be accomplished. I look forward to seeing further developments in this work in the years ahead, with the names of Deardorff, Stern, and Michigan at the forefront.

John Whalley University of Western Ontario