Regional trade policy uncertainty

Higher trade policy uncertainty has recessionary effects on U.S. states. To demonstrate this, we first build a novel empirical measure of regional trade policy uncertainty based on the volatility of national import tariffs at the sectoral level and on the sectoral composition of imports in U.S. states. We find that a state that is more exposed to an unanticipated increase in tariff volatility suffers from a larger drop in real GDP and employment than the average U.S. state. We then build a two-region open-economy model and find that the precautionary saving behavior is the main driver of the recession, although this effect is reinforced by high exposure to import tariffs. The feedback effect resulting from trade connections with the Foreign country primarily influences the persistence of these dynamics. ✩ The National Bureau of Economic Research has provided financial sponsorship to make this article open access and had no influence or involvement over the review or approval of any content. ✩✩ This article is part of a special issue entitled: ISOM 2024 published in Journal of International Economics. ★ We are grateful to the organizers of the 2024 NBER International Seminar on Macroeconomics (ISoM), Jordi Galí and Kenneth West as well as our discussants, Andrea Raffo and Joseph Steinberg, the Editor Linda Tesar and the participants for their insightful comments. The comments and remarks provided