Trade Protection, Stock-Market Returns, and Welfare
This paper develops a method of using financial data to understand the expected impact of trade policy on welfare and other real variables when the policy has heterogeneous and uncertain impacts on firms. We embed a firm-level specific factors model in a consumption capital asset pricing model to map expected cash-flow movements into expected movements in productivity, wages, and welfare. Using our framework, we find that the U.S.-China trade war caused increases in uncertainty and large declines in U.S. stock prices, expected cash flows, and expected productivity. We estimate that the expected decline in U.S. welfare is 4.9 percentage points.