Working Paper: NBER ID: w25965
Authors: George A. Alessandria; Shafaat Y. Khan; Armen Khederlarian
Abstract: We study the effects on international trade from the annual tariff uncertainty about China's MFN status renewal in the U.S. prior to joining the WTO. We have four main findings. First, in the monthly data trade increases significantly in anticipation of uncertain future increases in tariffs and falls upon renewal. Second, the probability of a tariff increase was perceived to be relatively small, with an average annual probability of non-renewal of about 3.2 percent. Third, what matters more is the expected future tariff rather than the uncertainty around it. We identify these effects using within-year variation in the risk of trade policy changes around the renewal vote and trade flows. We show that an (s; s) inventory model generates this behavior and that variation in the strength of the stockpiling in advance of the vote is increasing in the storability of goods. Fourth, the costs associated with the trade policy induced stockpiling reduce entrants' incentive to operate in a market with tariff uncertainty. Our results explain why trade may hold up in advance of a prospective policy change, such as Brexit or the U.S.-China escalating tariff war of 2018-19, but may fall sharply even if expected tariff increases do not materialize.
Keywords: Trade Policy Uncertainty; China; MFN Status; Inventory Model; Trade Dynamics
JEL Codes: E32; E60; F12; F13; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade Policy Uncertainty (TPU) (F13) | Trade Volumes (F14) |
| Expected Future Tariff (F17) | Trade Volumes (F14) |
| Trade Volumes (F14) | Trade Policy Uncertainty (TPU) Resolution (F13) |
| Stockpiling Behavior (D19) | Trade Volumes (F14) |
| Costs of Stockpiling (Q52) | Incentives for New Market Entrants (L13) |