Global demand and supply elasticities and the impact of tariff shocks

This study applies the Quadratic Almost Ideal Demand System (QUAIDS) to the Asian Development Bank's Multi-Region Input-Output (MRIO) dataset to estimate global demand and supply elasticities across intermediate vs. final, and domestic vs. foreign sectors. Using pooled data from 2021-2023, results show that supply is generally less responsive to income changes than demand, but more reactive to price changes, particularly for intermediate goods. Over time, demand for foreign intermediate and final goods has outpaced supply, reflecting a growing dependence on foreign inputs with low substitutability. At a more detailed sectoral level, demand elasticities exhibit stronger income and substitution effects, especially in Household final demand and intermediate Services, while supply elasticities are predominantly price-driven, with greater responsiveness in sectors such as Construction, Manufacturing, and Agriculture. These elasticities are then used to simulate welfare impacts of ongoing trade tensions between the USA and the rest of the world, using the latest bilateral tariff data. Findings indicate a global welfare loss of approximately -1.3%, with some countries, particularly those highly dependent on US imports with limited substitution options, face losses up to 5.6%. Counter-tariffs also adversely affect sanctioning countries; for example, Canada could experience revenue losses of up to 5%, while others see welfare losses ranging from 0.5-1.8%. Despite retaliatory tariffs, the USA faces minimal welfare losses. This framework presented in this paper showcases how monitoring elasticities can support with adapting policies to potential trade-related price shocks.