A News-Based Approach to Monitoring Trade Policy Uncertainty in a Small Open Economy: The Case of New Zealand

Firms’ investment in infrastructure or new staff is not easy to reverse. These irreversible costs mean firms prefer to wait and watch rather than investing in uncertain times. But how large are these effects in a small open economy such as New Zealand? We construct a Trade Policy Uncertainty Index from New Zealand media articles to gauge trade policy uncertainty over time. The index matches known historical periods of heightened trade policy uncertainty. Our results show that an increase in trade policy uncertainty decreases investment and slows hiring decisions by New Zealand firms, who prefer to wait rather than invest in uncertain times. We estimate uncertainty due to the early stages of the China-US trade war in 2018 decreased business investment by $315 million and delayed 2,240 job hires. This points to the value of using the index to monitor trade policy uncertainty for (i) early warning signs of investment and hiring slowdowns; and (ii) calibrating government action to reduce uncertainty on global trade conditions and New Zealand’s own trade policy initiatives. These initiatives are likely to be become more important if COVID-19 leads to increased trade protectionism.