Weaponizing Uncertainty

Abstract

The Trump Administration is deploying at scale a new weapon in trade protection – uncertainty. What are the economics of uncertainty and how will it affect trade and investment? We address these questions, drawing on established theory and recent empirical research into the impact of tariff threats on firm behaviour and, conversely, of the trade-liberalizing benefits of reducing uncertainty. Uncertainty matters – it acts like a non-tariff barrier that impedes trade and investment. Importantly, unlike actual tariffs, it has no direct price effect, is not subject to disciplines under trade agreements, is only indirectly observed and, by virtue of being indirect, it goes unchecked. Moreover, also unlike tariffs, uncertainty cannot always be easily withdrawn – like a good reputation ruined, its pernicious effects on confidence can take years to unwind.

Keywords: Trade Policy Uncertainty, Non-Tariff Barriers, Trade Wars

JEL Classification: F12, F13, F14