Essays on International Trade, Inequality, and Fiscal Policies

Abstract

This dissertation consists of two distinct chapters, studying the impact of geopolitical tensions on International Trade; and the connection between fiscal policies and inequality. The current state of geopolitical tensions is on the rise, and this has caused a significant decline in the global economy, particularly in international trade and finance. Geopolitical tensions refer to a wide range of political issues between two or more countries that induce tension and unrest, ranging from military conflict to climate change, the USA-China trade war, and Brexit. For this reason, one of the major drivers of trade policy has progressively been geopolitical conflicts. The first chapter of my dissertation provides research-driven facts and valuable contributions toward answering questions on how geopolitical tension, like Brexit, affects trade policies and global trade. This chapter studies the effect of Brexit due to trade policy shock not limited to only the United Kingdom (UK) and the European Union (EU), but with a much focus on third countries that have the UK as their major trading partner. I built a multi- country multi-sector general equilibrium Armington model with trade policy shock that features input-output linkage. Then, I calibrated this model to match the 2015 Eora multi-region input-output data. I then quantify the overall impact of Brexit by comparing the calibrated model with five different potential post-Brexit scenarios that may occur sometime in the future due to changes in trade costs. The findings show that Brexit affects other countries’ welfare, trade, and production patterns besides the UK and the EU. But the magnitude of these effects may depend on the type of trade agreement the UK agrees on with these other countries. Economic inequality is one of the severest problems in the 21st century, with significant long-term and unexpected existential implications. It has long been recognized as one of the biggest threats to the development and performance of the global economy. Fiscal policy is the most powerful tool governments use in addressing high levels of inequality. This is because it affects individual consumption directly through taxes and transfers and indirectly via other means, such as providing public goods, incentives for work, etc. In the second chapter of my dissertation, I provide empirical evidence on how fiscal policies like universal basic income (UBI), targeted cash transfers, and progressive taxation can reduce income inequality in South Africa. I compare the magnitude by which UBI versus TCT funded through progressive taxation can reduce income inequality in South Africa. The results reveal that a UBI or a TCT implemented alongside progressive taxation will reduce income inequality significantly; overall, TCT reduces inequality more than UBI.