Trading with Friends in Uncertain Times

Abstract

In this paper we seek to answer the question of how the patterns of bilateral trade are altered by rising trade policy uncertainty (TPU). Specifically, we investigate whether geopolitical alignments between country pairs determine how bilateral trade flows react during periods of greater uncertainty. Using a structural gravity framework augmented with a text-based TPU index and a geopolitical distance measure based on UN General Assembly voting records, we find a significant negative effect of the latter when TPU is elevated, indicating a shift to trading among “friends” in uncertain times.

Keywords: trade policy uncertainty, geopolitical distance, trade patterns, textual analysis, World uncertainty index, trade pattern, benchmark result, text-based TPU index, importer-exporter FE, Trade policy, Trade balance, Plurilateral trade, Trade tensions, Trade barriers, Global

JEL Classification: D80, F11, F13, F50, F14