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Policy Uncertainty, Trade and Welfare: Theory and Evidence for China and the U.S

Kyle Handley and Nuno Limão ()

No 9615, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We assess the impact of U.S. trade policy uncertainty (TPU) toward China in a tractable general equilibrium framework with heterogeneous firms. We show that increased TPU reduces investment in export entry and technology upgrading, which in turn reduces trade flows and real income for consumers. We apply the model to analyze China's export boom around its WTO accession and argue that in the case of the U.S. the most important policy effect was a reduction in TPU: granting permanent normal trade relationship status and thus ending the annual threat to revert to Smoot-Hawley tariff levels. We construct a theory-consistent measure of TPU and estimate that it can explain between 22-30% of Chinese exports to the US after WTO accession. We also estimate a welfare gain of removing this TPU for U.S. consumers and find it is of similar magnitude to the U.S. gain from new imported varieties in 1990-2001.

Keywords: China; policy uncertainty; trade; welfare; World Trade Organization (search for similar items in EconPapers)
JEL-codes: D8 D92 F1 F13 F14 F5 O24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2013-08
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Related works:
Working Paper: Policy Uncertainty, Trade and Welfare: Theory and Evidence for China and the U.S (2016) Downloads
Working Paper: Policy Uncertainty, Trade and Welfare: Theory and Evidence for China and the U.S (2013) Downloads
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