Policy Uncertainty, Trade, and Welfare: Theory and Evidence for China and the United States
American Economic Review · 2017 · Volume 107 · Issue 9
Abstract
We examine the impact of policy uncertainty on trade, prices, and real income through firm entry investments in general equilibrium. We estimate and quantify the impact of trade policy on China's export boom to the United States following its 2001 WTO accession. We find the accession reduced the US threat of a trade war, which can account for over one-third of that export growth in the period 2000-2005. Reduced policy uncertainty lowered US prices and increased its consumers' income by the equivalent of a 13-percentage-point permanent tariff decrease. These findings provide evidence of large effects of policy uncertainty on economic activity and the importance of agreements for reducing it.
Keywords
Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior, Trade Policy, International Trade Organizations, Empirical Studies of Trade, International Linkages to Development, Role of International Organizations, Socialist Institutions and Their Transitions: International Trade, Finance, Investment, Relations, and Aid
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