Working Paper: NBER ID: w24368
Authors: Jeronimo Carballo; Kyle Handley; Nuno Limao
Abstract: We examine the interaction of economic and policy uncertainty in a dynamic, heterogeneous firms model. Uncertainty about foreign income, trade protection and their interaction dampens export investment. This can be mitigated by trade agreements, which are particularly valuable in periods of increased demand volatility. We use firm data to establish new facts about U.S. export dynamics in 2003-2011 and estimate the model. We find a significant role for uncertainty in explaining the trade collapse in the 2008 crisis and partial recovery in its aftermath. Consistent with the model predictions, we find that the negative effects worked (1) through the extensive margin, (2) in destinations without preferential agreements with the U.S. (accounting for over half its trade) and (3) in industries with higher potential protection. U.S. exports to non-preferential markets would have been 6.5% higher under an agreement—equivalent to an 8% foreign GDP increase. These findings highlight and quantify the value of international policy commitments through agreements that mitigate uncertainty, particularly during downturns.
Keywords: Economic uncertainty; Policy uncertainty; Export dynamics; Trade agreements
JEL Codes: E02; E3; F02; F1; F15; F55; F6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic and policy uncertainty (D89) | export investment (F10) |
| economic and policy uncertainty (D89) | trade collapse during the 2008 crisis (F65) |
| trade agreements (F13) | impact of uncertainty (D80) |
| trade agreements (F13) | differential outcomes in export dynamics (F14) |
| extensive margin (F12) | contraction in US export growth during the crisis (F44) |
| PTAs (Z22) | export behavior during heightened uncertainty (F44) |