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Policy Uncertainty, Trade and Welfare: Theory and Evidence for China and the U.S

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  • Limão, Nuno
  • Handley, Kyle
Abstract
We assess the impact of U.S. trade policy uncertainty (TPU) toward China in a tractable general equilibrium framework with heterogeneous firms. We show that increased TPU reduces investment in export entry and technology upgrading, which in turn reduces trade flows and real income for consumers. We apply the model to analyze China's export boom around its WTO accession and argue that in the case of the U.S. the most important policy effect was a reduction in TPU: granting permanent normal trade relationship status and thus ending the annual threat to revert to Smoot-Hawley tariff levels. We construct a theory-consistent measure of TPU and estimate that it can explain between 22-30% of Chinese exports to the US after WTO accession. We also estimate a welfare gain of removing this TPU for U.S. consumers and find it is of similar magnitude to the U.S. gain from new imported varieties in 1990-2001.

Suggested Citation

  • Limão, Nuno & Handley, Kyle, 2013. "Policy Uncertainty, Trade and Welfare: Theory and Evidence for China and the U.S," CEPR Discussion Papers 9615, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9615
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    More about this item

    Keywords

    China; Policy uncertainty; Trade; World trade organization; Welfare;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • F1 - International Economics - - Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F5 - International Economics - - International Relations, National Security, and International Political Economy
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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