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Taking Stock of Trade Policy Uncertainty: Evidence from China’s Pre-WTO Accession

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  • George A. Alessandria
  • Shafaat Y. Khan
  • Armen Khederlarian

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. 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, what matters more is the expected future tariff rather than the uncertainty around it. 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 an (s; s) inventory model generates this behavior and that variation in the strength of the stockpiling in advance of the vote 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, such as Brexit or the U.S.-China escalating tariff war of 2018-19, but may fall sharply even if expected tariff increases do not materialize.

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  • George A. Alessandria & Shafaat Y. Khan & Armen Khederlarian, 2019. "Taking Stock of Trade Policy Uncertainty: Evidence from China’s Pre-WTO Accession," NBER Working Papers 25965, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25965
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    2. Asier Minondo, 2024. "How exporters neutralised an increase in tariffs," The World Economy, Wiley Blackwell, vol. 47(3), pages 1274-1296, March.
    3. Federico Esposito, 2019. "Demand Risk and Diversification through Trade," Discussion Papers Series, Department of Economics, Tufts University 0833, Department of Economics, Tufts University.
    4. Hong, T., 2021. "Revisiting the Trade Policy Uncertainty Index," Cambridge Working Papers in Economics 2174, Faculty of Economics, University of Cambridge.
    5. Esposito, Federico, 2022. "Demand risk and diversification through international trade," Journal of International Economics, Elsevier, vol. 135(C).
    6. Bianconi, Marcelo & Esposito, Federico & Sammon, Marco, 2021. "Trade policy uncertainty and stock returns," Journal of International Money and Finance, Elsevier, vol. 119(C).
    7. Cavallo, Alberto & Kryvtsov, Oleksiy, 2023. "What can stockouts tell us about inflation? Evidence from online micro data," Journal of International Economics, Elsevier, vol. 146(C).
    8. Khan, Shafaat Yar & Khederlarian, Armen, 2021. "How does trade respond to anticipated tariff changes? Evidence from NAFTA," Journal of International Economics, Elsevier, vol. 133(C).
    9. Dainauskas, J. & Lastauskas, P., 2024. "Trade Shocks and the Transitional Dynamics of Markups," Cambridge Working Papers in Economics 2431, Faculty of Economics, University of Cambridge.
    10. Alessandria,George & Khan,Shafaat Yar & Khederlarian,Armen & Ruhl,KimJ. & Steinberg,Joseph B., 2021. "Trade-Policy Dynamics : Evidence from 60 Years of U.S.-China Trade," Policy Research Working Paper Series 9741, The World Bank.
    11. Paul Ilhak Ko, 2020. "Dissecting Trade and Business Cycle Co-movement," 2020 Papers pko1026, Job Market Papers.
    12. Lukas Boer & Malte Rieth, 2024. "The Macroeconomic Consequences of Import Tariffs and Trade Policy Uncertainty," Discussion Papers of DIW Berlin 2072, DIW Berlin, German Institute for Economic Research.
    13. Benguria, Felipe & Choi, Jaerim & Swenson, Deborah L. & Xu, Mingzhi (Jimmy), 2022. "Anxiety or pain? The impact of tariffs and uncertainty on Chinese firms in the trade war," Journal of International Economics, Elsevier, vol. 137(C).
    14. Beshkar, Mostafa & Shourideh, Ali, 2020. "Optimal trade policy with trade imbalances," Journal of Monetary Economics, Elsevier, vol. 109(C), pages 65-82.
    15. Suwanprasert, Wisarut, 2022. "The international spillover effects of US trade policy uncertainty," Economics Letters, Elsevier, vol. 212(C).
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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