Whose policy uncertainty matters in the trade between China and the U.S.?

A few studies that have assessed the impact of economic policy uncertainty on trade flows, have used aggregate trade flows in a panel model. In this paper, we reduce aggregation bias by considering the response of each of the 87 industries in the trade between the U.S. and China to economic policy uncertainty in both countries. While we find significant short-run effects of both uncertainty measures in almost 55% of the U.S. exporting to and importing industries from China, short-run effects lasted into significant long-run effects in a limited number of large and small industries. More precisely, we found U.S. policy uncertainty to have negative long-run effects in 36 exporting industries with an export share of 43% and 25 importing industries with an import share of 11%. By contrast, we found China’s economic policy uncertainty to have positive long-run effects on the U.S. exports of 19 industries with an export share of 18% and on the U.S. imports of 24 industries with an import share of 13.5%. Clearly, increased tension between these two countries that contribute to increased uncertainty will hurt the trade balance of both countries.