Does Uncertainty Over Economic Policy Harm Trade, Foreign Investment, and Prosperity?

Abstract

This paper examines the impact of uncertainty about economic policy on US exports, imports, and direct foreign investment inflows. Uncertainty over domestic and international economic policy adversely affects the international ow of goods, services, and investment. When sunk costs are associated with acting, uncertainty about expected profits leads entrepreneurs to wait rather than act, reducing commerce domestically and internationally. A solution is for governments to commit to a set of rules that provides businesses with a predictable economic environment, reducing policy uncertainty. International organizations such as the World Trade Organization and agreements such as the North American Free Trade Agreement reduce policy uncertainty. The resulting positive effect on international commerce raises living standards in the United States and abroad.