Trade Policy Uncertainty and Exports: Evidence from China's WTO Accession

Abstract

This paper studies how reduction in trade policy uncertainty affects firm export decisions. Using a firm-product level dataset on Chinese exports to the United States and the European Union in the years surrounding China’s WTO accession, we provide strong evidence that reduction in trade policy uncertainty simultaneously induced firm entries to and firm exits from export activity within fine product-level markets. In addition, we uncover accompanying changes in export product prices and quality that coincided with this reallocation: firms that provided higher quality products at lower prices entered the export market, while firms that had higher prices and provided lower quality products prior to the changes, exited. To explain the simultaneous export entries and exits, as well as the change in product export prices and quality induced by trade policy uncertainty changes, we provide a model of heterogeneous firms which incorporates trade policy uncertainty, tracing the effects of the changes in policy uncertainty on firm-level payoffs and the resulting selection effects which apply to new entrants and incumbents.