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Trade and Investment under Policy Uncertainty: Theory and Firm Evidence

Kyle Handley and Nuno Limão

American Economic Journal: Economic Policy, 2015, vol. 7, issue 4, 189-222

Abstract: In a dynamic model with sunk export costs, a firm's export investment is lower under trade policy uncertainty, and credible preferential trade agreements (PTAs) increase trade even if current tariffs are low. Exploring Portugal's accession to the European Community as a policy uncertainty shock we find that the trade reform accounted for a large fraction of Portuguese exporting firms' entry and sales; the accession removed uncertainty about future EC trade policies; and this uncertainty channel accounted for a large fraction of the predicted growth. Our approach can be applied to other PTAs and sources of policy uncertainty. (JEL D22, F12, F14, F15, G31, L11)

JEL-codes: D22 F12 F14 F15 G31 L11 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/pol.20140068
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Working Paper: Trade and Investment under Policy Uncertainty: Theory and Firm Evidence (2012) Downloads
Working Paper: Trade and Investment under Policy Uncertainty: Theory and Firm Evidence (2012) Downloads
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