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International trade in an uncertain world

Author

Listed:
  • Benny Kleinman
  • Ernest Liu
  • Stephen J. Redding
  • David Xu

Abstract

We develop a tractable quantitative model of international trade in which agents make bilateral investments in resilience under general equilibrium uncertainty. Under both complete and incomplete financial markets, we show that these bilateral investments solve a portfolio problem of choosing trade partners. Countries' risk profiles become determinants of trade flows, income and welfare, whose first moments are affected by the second moments of productivity and trade costs. Changes in global economic uncertainty have heterogeneous effects across countries, depending on how they affect real hedging opportunities. The opening of trade can raise or reduce income volatility, but is revealed-preferred to autarky.

Suggested Citation

  • Benny Kleinman & Ernest Liu & Stephen J. Redding & David Xu, 2026. "International trade in an uncertain world," CEP Discussion Papers dp2196, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp2196
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