Policy Uncertainty, Trade and Welfare: Theory and Evidence for China and the U.S.
We assess the impact of U.S. trade policy uncertainty (TPU) toward China in a tractable general equilibrium framework with heterogeneous firms. We show that increased TPU reduces investment in export entry and technology upgrading, which in turn reduces trade flows and real income for consumers. We apply the model to analyze China's export boom around its WTO accession and argue that in the case of the U.S. the most important policy effect was a reduction in TPU: granting permanent normal trade relationship status and thus ending the annual threat to revert to Smoot-Hawley tariff levels. We construct a theory-consistent measure of TPU and estimate that it can explain between 22-30% of Chinese exports to the US after WTO accession. We also estimate a welfare gain of removing this TPU for U.S. consumers and find it is of similar magnitude to the U.S. gain from new imported varieties in 1990-2001.
We thank Stephanie Aaronson, Helia Costa, Lauren Deason, Rafael Dix-Carneiro, Gisela Rua, Jagadeesh Sivadasan and participants at the WAITS conference, Lisbon meeting on Institutions and Political Economy, Western Michigan University and University of Michigan for useful comments. Jeronimo Carballo provided excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Handley, Kyle, and Nuno Limão. 2017. "Policy Uncertainty, Trade, and Welfare: Theory and Evidence for China and the United States." American Economic Review, 107w(9): 2731-83.