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

92 Pages Posted: 30 Aug 2013 Last revised: 30 May 2015

See all articles by Kyle Handley

Kyle Handley

University of Michigan, Stephen M. Ross School of Business

Nuno Limão

University of Maryland - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2013

Abstract

We assess the impact of U.S. trade policy uncertainty (TPU) toward China in a tractable general equilibrium framework with heterogeneous firms. We show that increased TPU reduces investment in export entry and technology upgrading, which in turn reduces trade flows and real income for consumers. We apply the model to analyze China's export boom around its WTO accession and argue that in the case of the U.S. the most important policy effect was a reduction in TPU: granting permanent normal trade relationship status and thus ending the annual threat to revert to Smoot-Hawley tariff levels. We construct a theory-consistent measure of TPU and estimate that it can explain between 22-30% of Chinese exports to the US after WTO accession. We also estimate a welfare gain of removing this TPU for U.S. consumers and find it is of similar magnitude to the U.S. gain from new imported varieties in 1990-2001.

Suggested Citation

Handley, Kyle and Limão, Nuno, Policy Uncertainty, Trade and Welfare: Theory and Evidence for China and the U.S (August 2013). NBER Working Paper No. w19376. Available at SSRN: https://ssrn.com/abstract=2318279

Kyle Handley (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Nuno Limão

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-7842 (Phone)
301-405 3542 (Fax)

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