Trade-Policy Dynamics : Evidence from 60 Years of U.S.-China Trade

This paper studies the growth of Chinese imports into the United States from autarky during 1950–1970 to about 15 percent of overall imports in 2008, taking advantage of the rich heterogeneity in trade policy and trade growth across products during this period. Central to the analysis is an accounting for the dynamics of trade, trade policy, and trade-policy expectations. The analysis isolates the lagged effects of past reforms and the current effects of uncertainty about future reforms. It builds a multi-industry, heterogeneous-firm model with a dynamic export participation decision to estimate a path of trade-policy expectations. The findings show that being granted Normal Trade Relations (NTR) status in 1980 was largely a surprise and that, in the early stages, this reform had a high probability of being reversed. The likelihood of reversal dropped considerably during the mid-1980s, and, despite China’s accession to the World Trade Organization (WTO) in 2001, changed little throughout the late 1990s and early 2000s. Thus, although uncertainty depressed trade substantially following the 1980 liberalization, much of the trade growth that followed China’s WTO accession was a delayed response to previous reforms rather than a response to declining uncertainty.