TY - JOUR AU - Limão,Nuno AU - Maggi,Giovanni TI - Uncertainty and Trade Agreements JF - National Bureau of Economic Research Working Paper Series VL - No. 18703 PY - 2013 Y2 - January 2013 UR - http://www.nber.org/papers/w18703 L1 - http://www.nber.org/papers/w18703.pdf N1 - Author contact info: Nuno Limao Department of Economics University of Maryland 3105 Tydings Hall College Park, MD 20742 Tel: 301/405-7842 Fax: 301/405-3542 E-Mail: limao@econ.umd.edu Giovanni Maggi Department of Economics Yale University 37 Hillhouse Avenue Rm 27 New Haven, CT 06511 Tel: 203/432-3569 Fax: 203/432-6323 E-Mail: giovanni.maggi@yale.edu AB - In this paper we explore the potential gains that a trade agreement (TA) can provide by regulating trade-policy uncertainty, in addition to the more standard gains from reducing the mean levels of trade barriers. We show that in a standard trade model with income-risk neutrality there tends to be an uncertainty- increasing motive for a TA. With income-risk aversion, on the other hand, the uncertainty-managing motive for a TA is determined by interesting trade-offs. For a given degree of risk aversion, an uncertainty- reducing motive for a TA is more likely to be present when the economy is more open, the export supply elasticity is lower and the economy is more specialized. Governments have stronger incentives to sign a TA when the trading environment is more uncertain. As exogenous trade costs decline, the gains from decreasing trade-policy uncertainty tend to become more important relative to the gains from reducing average trade barriers. We also derive simple "sufficient statistics" to determine the direction of the uncertainty motive for a TA and the associated welfare gains, and we apply them to the trading relationship between US and Cuba before 1934. Finally, we examine how the uncertainty motive for a TA is affected by the presence of ex-ante investments, and examine conditions under which an uncertainty-reducing TA will increase investment in the export sector. ER -