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Policy Uncertainty, Trade, and Welfare: Theory and Evidence for China and the United States

Kyle Handley and Nuno Limão

American Economic Review, 2017, vol. 107, issue 9, 2731-83

Abstract: We examine the impact of policy uncertainty on trade, prices, and real income through firm entry investments in general equilibrium. We estimate and quantify the impact of trade policy on China's export boom to the United States following its 2001 WTO accession. We find the accession reduced the US threat of a trade war, which can account for over one-third of that export growth in the period 2000-2005. Reduced policy uncertainty lowered US prices and increased its consumers' income by the equivalent of a 13-percentage-point permanent tariff decrease. These findings provide evidence of large effects of policy uncertainty on economic activity and the importance of agreements for reducing it.

JEL-codes: D72 F13 F14 O19 P33 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20141419
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