Working Paper: CEPR ID: DP9301
Authors: Nuno Lima; Giovanni Maggi
Abstract: 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
Keywords: agreements; investment; policy uncertainty; trade
JEL Codes: F1; F13; F5; F6; O19
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade barriers decrease (F14) | uncertainty-reducing motive for trade agreements becomes more significant (F12) |
| uncertainty (D89) | likelihood of trade agreement formation (F13) |
| higher risk aversion (D81) | stronger uncertainty-reducing motive for trade agreements (F13) |
| decline in exogenous trade costs (F12) | increase in relative importance of uncertainty-reducing motive (D81) |
| lower export supply elasticities and higher levels of specialization (F14) | more likely to benefit from uncertainty-reducing trade agreements (F13) |