Trade Policy Uncertainty Research Articles

Does Resolution of Trade Policy Uncertainty Affect Shareholder Returns in Mergers and Acquisitions?

Does Resolution of Trade Policy Uncertainty Affect Shareholder Returns in Mergers and Acquisitions?

The Influence of Policy Uncertainty on Exchange Rate Forecasting

Using the economic policy uncertainty (EPU) index of Baker et al. (2016), we examine the influence of EPU on the characteristics of USD/JPY exchange rate forecasts. Our sample period, which spans two decades, incorporates a range of economic and political conditions for the US and Japan. Consistent with higher EPU engendering a more complex information environment, our results clearly demonstrate that analyst forecast errors, and forecast dispersion, increase with EPU. US monetary policy uncertainty and Japanese trade policy uncertainty are particularly important in generating forecast dispersion. The empirical findings are consistent across forecast horizons ranging from 1-month to 1-year. This has important implications for market participants who use exchange rate forecasts when making business and investment decisions.

The Multifaceted Impact of US Trade Policy on Financial Markets

We study the multifaceted effects and persistence of trade policy shocks on financial markets in a structural vector autoregression. The model is identified via event day heteroskedasticity. We find that restrictive US trade policy shocks affect US and international stock prices heterogeneously, but generally negatively, increasing market uncertainty, lowering interest rates, and leading to an appreciation of the US-Dollar. The effects are significant for several weeks or quarters. Regarding shock types, we reveal a dominating trade policy uncertainty shock and a weaker level shock. Chinese trade policy shocks against the US further hurt US stocks.

US policy uncertainty and stock returns: evidence in the US and its spillovers to the European Union, China and Japan

Purpose Recent empirical studies by Antonakakis, Chatziantoniou and Filis (2013), Brogaard and Detzel (2015) and Christou et al. (2017) present evidence, which supports the notion that a rise in economic policy uncertainty (EPU) will lead to a decline in stock prices. The purpose of this paper is to examine US categorical policy uncertainty on stock returns while controlling for implied volatility and downside risk. In addition to the domestic impacts of policy uncertainty, this paper also presents evidence that changes in US policy uncertainty promptly propagates to the global stock markets. Design/methodology/approach This study uses a GED-GARCH (1, 1) model to estimate changes of uncertainties in US monetary, fiscal and trade policies on stock returns for the sample period of January 1990–December 2018. Robustness test is conducted by using different set of data and modeling techniques. Findings This paper contributes to the literature in several aspects. First, testing of US aggregate data while controlling for downside risk and implied volatility, consistently, shows that responses of stock prices to US policy uncertainty changes, not only display a negative effect in the current period but also have at least a one-month time-lag. The evidence supports the uncertainty premium hypothesis. Second, extending the test to global data reveals that US policy uncertainty changes have a negative impact on markets in Europe, China and Japan. Third, testing the data in sectoral stock markets mainly displays statistically significant results with a negative sign. Fourth, the evidence consistently shows that changes in policy uncertainty present an inverse relation to the stock returns, regardless of whether uncertainty is moving upward or downward. Research limitations/implications The current research is limited to the markets in the USA, eurozone, China and Japan. This study can be extended to additional countries, such as emerging markets. Practical implications This paper provides a model that uses categorical policy uncertainty approach to explain stock price changes. The parametric estimates provide insightful information in advising investors for making portfolio decision. Social implications The estimated coefficients of changes in monetary policy uncertainty, fiscal policy uncertainty and trade policy uncertainty are informative in assisting policymakers to formulate effective financial policies. Originality/value This study extends the existing risk premium model in several directions. First, it separates the financial risk factors from the EPU innovations; second, instead of using EPU, this study investigates the effects from monetary policy, fiscal policy and trade policy uncertainties; third, in additional to an examination of the effects of US categorical policy uncertainties on its own markets, this study also investigates the spillover effects to global major markets; fourth, besides the aggregate stock markets, this study estimates the effects of US policy uncertainty innovations on the sectoral stock returns.

Does Trade Policy Uncertainty Affect Agriculture?

AbstractThis article reviews evidence of trade war impacts and emerging concerns on trade policy uncertainty. Trade war's near‐perfect pass‐through of tariffs to US prices favored producers and generated government revenue at the expense of consumers. Facing retaliation, prices and trade volumes were found to be lower for US agricultural commodities. The recent rethink on the benefits of globalization by major economies has led to uncertain policy paths wherein firms and consumers continue to make decisions. Using quarterly data, a negative association between policy uncertainty and agricultural economic indicators is affirmed with implications for future evaluation of trade war impacts.

Political Uncertainty, FDI, and Trade In Intermediate Goods: Evidence From Ukrainian Firms

In this paper, we introduce a new method to measure uncertainty using quantitative text analysis and explore the effects of uncertainty on firm performance. We extend a theoretical model with heterogeneous firms and sunk investments to derive hypotheses about the impact of trade policy uncertainty (TPU) on firm-specific investment and firm’s decision to trade intermediate goods. We look at Ukraine’s trade relations with EU and Russia to measure TPU and to test our predictions. Ukrainian firms faced considerable uncertainty with regards to two mutually exclusive trade policies: the conclusion of a free trade agreement with the European Union (EU FTA) or a customs union with Russia (RU CU). Using firm-product level data of Ukrainian manufacturing firms between 2003 and 2013, we find a substantive increase in firm level FDI inflows and imported intermediate goods from EU countries and a decrease in FDI from the Customs Union, once uncertainty with regards to the EU FTA is reduced. Moreover, more protected goods respond stronger to a reduction in TPU. The novel measure of uncertainty can be easily applied to other cases where governments face multiple mutually exclusive policy options.

The Dynamic Correlation between China’s Policy Uncertainty and the Crude Oil Market: A Time-varying Analysis

ABSTRACT This research investigates the dynamic correlation between China’s policy uncertainty and the crude oil markets (i.e. domestic and international markets) using monthly time-series data from May 2003 to December 2018. To consider the non-linear and dynamic properties, we adopt the time-varying parameter structural vector autoregression model (TVP-SVAR) to estimate the dynamic correlations between the time series. By employing four categorical policy uncertainty indices, i.e. monetary policy uncertainty index (MYPU), fiscal policy uncertainty index (FLPU), exchange rate policy uncertainty index (EXER), and trade policy uncertainty index (TEPU), our results reveal that the correlation between China’s policy uncertainty and real crude oil returns is time-varying and non-linear. Specifically, the independence between policy uncertainty and oil returns varies more constantly and at a high degree while the time-varying interaction between policy uncertainty and global oil production (global economic activity) varies at a lower frequency and at a low level. Furthermore, regarding the associations between categorical policy uncertainty and global oil returns, the average correlation of EXER (negative) is the strongest one, followed by FLPU (negative), then MYPU (positive), and finally TEPU (negative). Moreover, it is noteworthy that WTI (Daqing) crude oil prices are utilized to increase the robustness of our conclusions. Finally, we generally confirm the dynamic and negative correlation between China’s geopolitical risk and crude oil returns. It is evidently clear from the results that investors should pay close attention to the policy uncertainty to avoid the adverse impact of specific policy uncertainty on crude oil returns.

The US-China trade war with increasing trade policy uncertainty

PurposeThis study aims to examine the impacts of changing US trade policy uncertainty (henceforth, TPU Index) on US bilateral trade balance with China from a nonlinear methodology perspective.Design/methodology/approachThe nonlinear auto regressive distributed lag (ARDL) model, recently developed by Shin et al. (2014), is applied. This model decomposes the TPU Index series into its increases (TPU+) and decreases (TPU−) and creates two new TPU Index series.FindingsEmpirical findings indicate that increases in the TPU Index improve the US bilateral trade balance only in the short-run (no long-run impact). However, decreases in the TPU Index worsen the US trade balance in the short run but improve it in the long run. Apart from these effects detected on US–China bilateral trade balances, this empirical study draws the conclusion that changing trade policy uncertainty plays a significant determining role for bilateral trade volumes.Originality/valueDecomposed TPU index with the nonlinear ARDL model enables us to examine the separate impacts of the changes in TPU+ and TPU− indexes on US bilateral trade balance with China. Therefore, this model may discover potentially concealed-hidden true impacts of TPU index on US bilateral trade balance with this country.

The effects of investor attention and policy uncertainties on cross-border country exchange-traded fund returns

Using a new panel quantile regression approach, this research explores how investor attention and policy uncertainties affect conditional return distributions for 126 cross-border U.S. trading single-country exchange traded funds (ETFs). We find that economic, fiscal, and monetary policy uncertainties negatively impact most of the ETF return quantiles, implying that a non-linear relationship exists, but trade policy uncertainty has asymmetric impacts on current returns that are salient positive in the following period. Therefore, considering four policy uncertainties allows us to completely analyze a single-country ETF market, thus providing valuable insights for ETF portfolio investors, hedge trading, and policymakers.

Spillovers and connectedness in foreign exchange markets: The role of trade policy uncertainty

This paper analyses the directional spillover effects and connectedness for both return and volatility of nine US dollar exchange rates of globally most traded currencies under the influence of trade policy uncertainty. We find two interesting results over the study period ranging from December 1993 to July 2019. First, there exists asymmetric spillovers and connectedness among the considered exchange rates when trade policy uncertainty is present. Second, the volatility spillover is stronger than the return connectedness between exchange rate and trade policy uncertainty. These findings are robust to the presence of economic policy uncertainty effects. Concomitantly, the trade policy uncertainty patterns are also found to be useful for predicting currency market dynamics. Our findings contribute to the debate on the impact of trade policy uncertainty on the global economy and financial sector.

Trade policy uncertainty and innovation: Firm level evidence from China’s WTO accession

This study proposes a novel channel through which trade liberalization may induce innovation through the reduction of trade policy uncertainties (TPU) in destination markets. To verify this linkage, we utilize the significant reduction of TPU engendered by China’s accession to the World Trade Organization (WTO) in 2001 as a quasi-natural experiment. We find that reduction in TPU significantly encourages firms’ patent application: firms in sectors with a larger reduction in uncertainty filed more invention patent applications after China’s WTO accession. We also find that firms’ innovation responses to TPU reduction vary by productivity, ownership, exporting status, and the irreversibility of investment.

Trade policy uncertainty and its impact on the stock market -evidence from China-US trade conflict

We study the impact of international trade policy uncertainty (TPU) on equity markets. To capture the current tension in the relationship between China and the US, we use monthly stock market volatility and TPU indices of China and US from 2000 to 2019. By adopting a time-varying VAR model (TVP-SV-VAR), we find that TPU has heterogeneous effects on U.S. and China stock market. U.S. TPU has stronger impact on both U.S. and Chinese stock market. Time-varying characteristics show that U.S. - China trade conflicts have positive effect on U.S. stock market but a negative effect on Chinese stock market.

How the Internet Promotes China's Exports: A Firm‐level Perspective

AbstractThe development of information and communications technology (ICT), particularly the Internet, has reduced trade costs. However, it remains unclear whether these reduced costs are reflected in the “extensive margins” of firms’ exports (which refer to the probability of firms exporting) or the “intensive margins” (which refer to the value of firms’ export). To test this, we used the concepts of information cost and binary margins, an augmented trade model of firm heterogeneity, a two‐stage Heckman estimation, and data from the World Bank Enterprise Survey of Chinese firms in 2012. The results revealed that reduced trade costs from the use of ICT were positively related to extensive margins but that the connection with intensive margins was not significant. The results lead to the conclusion that reduced information costs related to a firm's exporting behavior were primarily reflected in variable trade costs. This study offers theoretical and empirical evidence for China's policies towards the Internet, which are relevant for the export of manufactured goods. The government should encourage the use of ICT to enhance firms’ export opportunities while facing current trade policy uncertainty.

Is US trade policy uncertainty powerful enough to predict global output volatility?

ABSTRACT Trade policy uncertainty is at an all-time high in the United States and continues to escalate. This paper empirically examined the ability of US trade policy uncertainty to predict global output volatility. To this end, a battery of econometric tests was employed—Toda and Yamamoto linear Granger causality test, nonparametric test for nonlinear causality, and nonlinear Granger causality test in frequency domain. Findings based on standard linear Granger causality tests suggested that US trade policy uncertainty is not a significant predictor of global output volatility. Further tests, however, showed that due to the presence of nonlinearities in the US trade policy uncertainty–global output volatility nexus, the linear Granger causality framework initially relied upon might have led to misspecification. Consequently, a nonparametric causality test was further conducted. The test results showed that in fact the US trade policy uncertainty is a significant predictor of global output volatility. To further verify the findings, the powerful frequency domain-based Granger causality test which is able to detect causality at short, medium and longer horizons was conducted. The test findings again confirmed that trade policy uncertainty emanating from the United States is a significant predictor of global output volatility.

Fighting Trade War with FDI Policy Reforms

China accelerated FDI policy reforms since the presidency of Donald Trump. We evaluate how multinational enterprises (MNEs) respond to such reforms amid rising trade policy uncertainty. Applying difference-in-differences approach on monthly bilateral FDI from 2015 to 2019, we find that reforms increase FDI to China significantly after their implementation in July 2017. The increase in FDI concentrates in industries such as the manufacture of automobile and machinery equipment that have undergone intensive reforms. In addition, the rising FDI is mainly underpinned by economies that have substantial export exposure and investment experience in China, such as Germany, South Korea and Japan. Further analysis reveals that FDI from economies and industries that are more exposed to the reforms through trade networks, increases more aggressively. We find no evidence that FDI responds to the tariff hikes or trade policy uncertainty arisen from the US-China trade war.

Export Liberalization and Domestic Policy Distortion: Evidence from VAT Rate Dispersion in China

Tax policies are implemented with significant degree of distortion across firms. Using data on Chinese firms' value-added tax (VAT) payment, we empirically investigate whether export liberalization affects the within-industry VAT rate dispersion across firms, a direct measure of distortion. Adopting the trade policy uncertainty (TPU) shock upon China's WTO accession as the identification strategy, we use the difference-in-difference approach to show that export liberalization through the removal of TPU significantly decreases the within-industry VAT rate dispersion. This result remains significant throughout a series of robustness checks. Our paper thus highlights another source of gains from trade liberalization through mitigating domestic misallocation.

Global uncertainties and portfolio flow dynamics of the BRICS countries

This paper investigates the dynamics of bond and stock market capital flows to BRICS countries under uncertainties such as global economic policy uncertainty and the US trade policy uncertainty. We use a time-varying Granger causality framework over the January 2008-November 2019 period to analyze the predictive power of uncertainties on capital flows in the form of bond and equity. The results show that the effects are heterogeneous across countries and stronger during the Global Financial Crisis period and post-2018 period while it lost its significance in the subsequent period. The negative influence of uncertainties on capital flows directed to BRICS countries is also evident in the results of non-parametric time-varying panel models. Overall, it is thought that the heterogeneous structure of the causality between uncertainty and portfolio flows into BRICS may present portfolio diversification benefits for global investors.

Does trade policy related uncertainty affect international trade? Evidence from the US-China commodity trade

ABSTRACT This study examines the impacts of US and China trade policy uncertainties on the US’s commodity level bilateral trade balances (henceforth, BTBs) with China. To this end, newly created trade policy uncertainty (henceforth, TPU) indexes for both countries are used and the nonlinear ARDL model is applied. Empirical findings indicate that the impacts of US and China TPU indexes on US’s aggregated and disaggregated data BTBs are mostly different. The aggregated data model finds that increases in the US TPU index worsen US’s BTB. However, disaggregated models find ‘improvements’ in 4 and ‘no impacts’ in 3 commodities out of 10. Similarly, while the aggregated data model finds that increases in China’s TPU index improves US’s BTB, disaggregated models find ‘worsen’ in 4 and ‘no impacts’ in 5 commodities our of 10. Furthermore, increases in the US’s TPU index worsen US BTB the most in commodity beverages and tobacco.

The WTO is not passé

Abstract The empirical literature on the effect of trade agreements has reached a consensus that WTO effects are insignificant or modest at best especially compared to the robust and strong positive effect of preferential trade agreements (PTAs) on bilateral trade (Rose, 2004; Eicher and Henn, 2011; Baier and Bergstrand, 2007, 2009). In this paper, we show that previous work that reports “average treatment effects” on trade flows fails to account for the heterogeneity in the effects of trade arrangements over time, leading to an underestimation of the WTO effect on bilateral trade. We present semi-parametric estimates of the impact of WTO membership, allowing for heterogeneity of WTO effects over time. We find evidence for strong WTO effects over time, with the WTO effects increasing almost monotonically with years of membership. In fact, in the long-term, the magnitude of the WTO effect exceeds those of the PTA effects. We also find that the strongest WTO effect over time is for destinations that are developing countries that underwent rigorous accession procedures to join the WTO. Disaggregating PTAs into bilateral, multilateral, and deep integration (customs union, common markets, and economic union), we find that the long-term effects of WTO membership dominate bilateral and multilateral PTAs but fall short of deep integration arrangements. Finally, we show that WTO membership increases both the extensive and intensive margins of trade over time, with a stronger impact on the former. Our results are consistent with gradual trade liberalization and declining trade policy uncertainty over time, following WTO membership.

Uncertainty about Future Policy Changes Could Be Harming the US Economy

This paper examines the impact of economic and trade policy uncertainty on US imports, US exports, and foreign direct investment inflows to the United States. Using alternative indices of uncertainty and controlling for the level of tariffs, I find that higher levels of US policy uncertainty generally depress international trade and investment and increase the variability of investment inflows. Higher levels of policy uncertainty abroad also impact trade and investment flows. Consumers and businesses would benefit from clear signals concerning the future course of economic policy in the United States and abroad.