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

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  • Kyle Handley

    (University of Michigan)

  • Nuno Limao

    (University of Marylan and NBER)

Abstract

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.

Suggested Citation

  • Kyle Handley & Nuno Limao, 2016. "Policy Uncertainty, Trade and Welfare: Theory and Evidence for China and the U.S," Working Papers 650, Research Seminar in International Economics, University of Michigan.
  • Handle: RePEc:mie:wpaper:650
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    References listed on IDEAS

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    More about this item

    Keywords

    China; World Trade Organization; Policy Uncertainty; Welfare;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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