Disaster at Sea: Estimating the Economic Impacts Posed by a Closure of Maritime Trade in the South China Sea Using Industry Disaggregated Trade Flows

Abstract

Building upon a previous attempt, the study simulates a closure of the South China Sea to maritime trade and estimates welfare changes for economies around the world. Heightened tensions in the region have increased the risk of outright conflict between major powers to the highest level in decades, so the author interacts trade distance data with country-country trade data in both a CES model and multi-industry model to offer refined estimates of gains from trade in the region. The results estimate het- erogeneous and severe welfare declines for many countries, though to a more modest degree than those of previous estimates. A multi-industry approach accounting for heterogeneity in price and trade elasticity is shown to magnify implied gains from trade than does a CES model. Analysis suggests both models offer distinct geopolit- ical incentive structures that may lend explanatory value for nations’ grand strategic moves.