Parameter Sensitivity Analysis of Hierarchical Spatial Economy: Trade Strategy around Brexit

Abstract

This paper presents a systematic framework for analyzing the economic parameter sensitivity of a hierarchical spatial economy within economic geography models. Through the hierarchical reduction approach proposed in this study, the original region-level governing equation is condensed into country-level and alliance-level equations. Based on the reduced governing equation, we formulate the sensitivity of economic variables on each country's population. This approach is applied to the analysis of international trade competition -- covering both trade liberalization and protectionism around Brexit -- among the UK, France, and Germany. We find that both the UK and the EU should focus on reducing domestic transportation costs, whereas tariffs and retaliatory tariffs act as a double-edged sword that can either strengthen or weaken their trade positions.