Oil price shocks, economic policy uncertainty and China’s trade: A quantitative structural analysis

Abstract

This article studies the effects of oil price shocks and economic policy uncertainty on China’s trade. We find oil supply and economic policy uncertainty shocks can significantly decrease China’s real export while oil aggregate demand and oil specific demand shocks can significantly increase the real export. Meanwhile, oil supply and oil aggregate demand shocks can significantly increase China’s real import. In addition, oil aggregate demand and oil specific demand shocks can significantly decrease the Chinese trade terms, whereas economic policy uncertainty shocks can significantly increase the terms of trade. We also detect that economic policy uncertainty shocks play the most important role in accounting for the variance of real export, import and terms of trade. Finally, we uncover that the sharp decrease in China’s trade during the period 2008Q4-2009Q3 can be largely explained by shocks in the world oil market, while the decrease in China’s trade in the period 2014Q4-2016Q1 is mainly driven by global economic policy uncertainty shocks.