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Trade policy uncertainty and market diversification by risk-averse firms

Author

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  • Chen, Zhiyuan
  • Wang, Zhihao
  • Zhu, Ting
  • Gu, Kejian
  • Tang, Ying

Abstract

This study investigates the relationship between trade policy uncertainty (TPU) and market diversification with risk-averse firms. We build a model to demonstrate how a risk-averse firm diversifies risks stemming from escalating TPU through entering new markets whose trade policies are negatively correlated with ones in its already-entered markets. The positive effect of TPU on market diversification is moderated if the firm has lower risk hedging ability and/or is less risk-averse. Conditional on the TPU in the already-entered markets, there is an inverted-U relationship between TPU in the new market and the probability of entering it. Using a unique firm-product-level dataset on Chinese exporters, we find robust evidence supporting our theoretical predictions.

Suggested Citation

  • Chen, Zhiyuan & Wang, Zhihao & Zhu, Ting & Gu, Kejian & Tang, Ying, 2025. "Trade policy uncertainty and market diversification by risk-averse firms," China Economic Review, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:chieco:v:91:y:2025:i:c:s1043951x25000586
    DOI: 10.1016/j.chieco.2025.102400
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    Keywords

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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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