Taking stock of trade policy uncertainty: Evidence from China’s pre-WTO accession

George Alessandria, Shafaat Khan and Armen Khederlarian

Journal of International Economics, 2024, vol. 150, issue C

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. The peak-to-trough swings in trade are 62 percent of the possible tariff change. 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, the anticipatory dynamics are entirely driven by the expected increase in tariffs, while uncertainty dampens them. 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 a (s̲,s¯) inventory model generates this behavior and that variation in the strength of the stockpiling in advance of the renewal decision 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 but may fall sharply even if expected tariff increases do not materialize.

Keywords: Trade policy uncertainty; Anticipation; Inventories; China shock; Stockpiling (search for similar items in EconPapers)
JEL-codes: F12 F13 F14 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Working Paper: Taking Stock of Trade Policy Uncertainty: Evidence from China’s Pre-WTO Accession (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:150:y:2024:i:c:s0022199624000655

DOI: 10.1016/j.jinteco.2024.103938

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