Impact of National and Global Uncertainty on Iran’s Trade Balance and Selected Trading Partners with an Emphasis on Export Diversification: A Time-Varying Parameter Approach

In most developing countries today, the foreign trade sector is considered a key lever for economic growth and development. One of the main factors determining an economy’s vulnerability to various forms of uncertainty lies in the composition of its output, reflected in the structure of its export and import commodities. Countries with high export diversification enjoy more stable foreign-exchange earnings and greater resilience in the face of different types of uncertainty. Accordingly, this study investigates the impact of national and global uncertainty on Iran’s trade balance and its selected trading partners (China, India, and Turkey), with an emphasis on export diversification, using the Vector Autoregression (VAR) method and a time-varying parameter connectedness approach over the period 2004:04–2022:12. The variables used in the research include Iran’s uncertainty, global uncertainty, exports to selected countries, imports from selected countries, bilateral real exchange rate, trade balance, GDP ratio between the two countries, and the export diversification index. The results indicated that Iran’s domestic uncertainty had a greater impact on the variables related to bilateral trade among the countries studied than global uncertainty. During periods of improved export diversification, the effect of uncertainty was weaker—a finding clearly evident in the net pairwise directional connectedness results for Turkey and India. Notably, the Iran–India bilateral trade model effectively reflected the relationship between export diversification and uncertainty.