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Policy Uncertainty, Trade and Welfare: Theory and Evidence for China and the U.S

Listed author(s):
  • Kyle Handley

    (University of Michigan)

  • Nuno Limao

    (University of Marylan and NBER)

We examine the impact of policy uncertainty on trade, prices and real income through firm entry investments in general equilibrium. We estimate and quantify the impact of trade policy on China's export boom to the U.S. following its 2001 WTO accession. We find the accession reduced the U.S. threat of a trade war, which can account for over 1/3 of that export growth in 2000-2005. Reduced policy uncertainty lowered U.S. prices and increased its consumers' income by the equivalent of a 13 percentage point permanent tariff decrease. These findings provide evidence of large effects of policy uncertainty on economic activity and the importance of agreements for reducing it.

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File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers626-650/r650.pdf
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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 650.

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Length: 81 pages
Date of creation: Mar 2016
Handle: RePEc:mie:wpaper:650
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Web page: http://fordschool.umich.edu/rsie/
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