Trade policy uncertainty: Evidence from the Arab League countries

Abstract

AbstractWe investigate the effects of trade policy uncertainty on the entry decisions of exporters into Arab League markets. Using a product‐level dataset on World Trade Organization members exporting to Arab League countries for the years 1998–2015, we provide empirical evidence that trade policy uncertainty, a result of significant gaps between tariff bindings and applied tariffs (“tariff water”), led to the reduced entry of exporters into Arab League markets. We then extend our analysis to investigate the effects of policy uncertainty combined with additional uncertainty related to falling incomes associated with the 2007–2010 worldwide economic downturn. Our results suggest that this macroeconomic shock contributed to a considerably more uncertain economic environment, thereby affecting the decision to enter these markets. We also analyze exporters’ decisions to enter new markets, while controlling for the level of market power displayed by the Arab League importing country. We find empirical evidence confirming that the effects of uncertainty on entry magnify in the presence of high levels of market power.