Working Paper: CEPR ID: DP9615
Authors: Kyle Handley; Nuno Lima
Abstract: 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.
Keywords: China; Policy Uncertainty; Trade; Welfare; World Trade Organization
JEL Codes: D8; D92; F1; F13; F14; F5; O24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US trade policy uncertainty (TPU) (F13) | investment in export entry (F10) |
| investment in export entry (F10) | trade flows (F10) |
| US trade policy uncertainty (TPU) (F13) | technology upgrading (O39) |
| technology upgrading (O39) | trade flows (F10) |
| US trade policy uncertainty (TPU) (F13) | real income for consumers (F61) |
| reduction in US trade policy uncertainty (TPU) (F13) | enhanced export performance (F14) |
| US trade policy uncertainty (TPU) (F13) | aggregate welfare effects (E10) |
| reduction in TPU (O39) | trade flows (F10) |
| TPU (O39) | Chinese exports to the US (F14) |
| removal of TPU (F13) | welfare gain for US consumers (D69) |