The Effects of Economic Policy Uncertainty on Export: A Gravity Model Approach

Abstract

We use a gravity model that accounts for multilateral resistance terms (MRT) to examine the impact of economic policy uncertainty (EPU) on a country's export. Empirical analysis based on data from 20 countries that traded with one another (creating 380 pairs of importing-exporting countries) over the period 2002-2016 shows that the export of a country is negatively associated with the EPU of its corresponding importing country, but not with the EPU of the exporting country itself. This effect remains qualitatively unchanged regardless whether the exporting country is a developed or a developing economy and whether it focuses on commodities or non-commodities, but the effect is smaller for commodity exporters. Furthermore, the observed negative effect is more pronounced when the unemployment rate in the importing country is high, whilst GDP growth in the importing country does not influence the focal relationship. These findings advance the literature by highlighting the importance of accounting for the differential effects of policy uncertainty in importing and exporting countries and of taking into consideration country and product heterogeneity when analysing the effects of EPU on exports.

Policy Uncertainty, Trade, and Welfare: Theory and Evidence for China and the United States

“…We use the same linear approximation of ln U V as the OLS gravity estimates of equation (11). 18 We compute the change in the price indices for each industry using the approach in Feenstra (1994), which captures the new varieties and changes in the price of existing ones. We define varieties at the HS-10 product-country level, as in Broda and Weinstein (2006).…”

“…In column 1 we see the uncertainty effect estimated at the same level as export growth, HS-6, is significant and robust to controlling for sector effects (column 2). 19 The partial effects of uncertainty 18 Thus, ln…”

“…The model predicts that at least a fraction G( c sV U ) of Chinese firms in V export to the United States under state s . The growth in this cutoff is given by (18) and its TPU component is obtained by holding tariffs fixed. Therefore, under a Pareto distribution, the growth in the number of exporters is simply k times that expression.…”

Perceived macroeconomic uncertainty and export: evidence from cross-country data

“…For example, using quarterly data from 31 countries in 1998-2016, Tam (2018), show that United States and Chinese EPU has a negative impact on global trade flows. Utilizing country-pair data, Jia et al (2020) find that a higher level of EPU in importing countries has an inhibitory effect on trade volume in exporting countries, but the impact of EPU in exporting countries is not significant.…”

“…First, some scholars believe that trade policy uncertainty (Handley & Limão, 2015 and newspaper-based policy-related uncertainty (Jia et al, 2020;Tam, 2018) will also generate some effect on trade. If the impact of these uncertainties is not controlled, the estimated results of Table 2 may be biased.…”