Exporting under Trade Policy Uncertainty: Theory and Evidence

I provide novel evidence for the impact of trade policy uncertainty on exporters. In a dynamic, heterogeneous firms model, trade policy uncertainty will delay the entry of exporters into new markets and make them less responsive to applied tariff reductions. Policy instruments that reduce or eliminate uncertainty, such as binding trade policy commitments at the WTO, increase entry. The predictions are tested on disaggregated, product-level Australian imports with model-consistent measures of uncertainty. Reducing policy uncertainty generates more product entry than unilateral liberalization. The results illuminate and quantify an important new channel for trade creation.