Caught in the Crossfire: How Trade Policy Uncertainty Impacts Global Trade

Anirban Sanyal

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: Trade policy uncertainty impacts firm's decisions to enter export markets and make new investments. I extend the trade policy uncertainty literature in a multi-country trade model to evaluate the uncertainty effect on global trade flows. The model introduces two sources of uncertainty; namely a policy change probability and tariff size uncertainty. Using these two sources of uncertainty, I argue that the trade policy uncertainty moderates global trade flows and increases domestic price level due to lack of certainty in price distributions. The framework can be generalized to other uncertainties in trade partners. Finally, the model calibration demonstrates that a moderation of trade flows during the recent trade war period, can be explained by trade policy uncertainty.

Keywords: trade policy uncertainty; trade flows; sectoral heterogeneity (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:272825

DOI: 10.2139/ssrn.4471238

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