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Taking Stock of Trade Policy Uncertainty: Evidence from China’s Pre-WTO Accession

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  • George A. Alessandria
  • Shafaat Y. Khan
  • Armen Khederlarian

Abstract

We study the effects on trade from the annual tariff uncertainty about China’s MFN status renewal prior to joining the WTO. We have three main findings. First, counter to the evidence elsewhere, trade increases strongly in anticipation of uncertain future increases in tariffs. Second, even though the trade response can be quite large, the probability of a tariff increase was perceived to be relatively small, with an average annual probability of non-renewal of about 5.5 percent. And third, what matters more is the expected future tariff rather than the uncertainty around it. We identify these effects using within-year variation in the risk of trade policy changes around the renewal vote and trade flows. We show that an (s,s) inventory model generates this behavior and that variation in the strength of the stockpiling in advance of the vote is increasing in the storability of goods. The model is also consistent with a sizeable fraction of the cross-industry variation in annual trade flows documented elsewhere. Our results explain why trade may hold up well in advance of a prospective policy change such as Brexit or the US escalating tariff war of 2018-19, but may fall off sharply even if expected tariff increases do not materialize.

Suggested Citation

  • George A. Alessandria & Shafaat Y. Khan & Armen Khederlarian, 2019. "Taking Stock of Trade Policy Uncertainty: Evidence from China’s Pre-WTO Accession," NBER Working Papers 25965, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25965
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • 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

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