This paper attempts to quantify the impact of economic policy uncertainty on overall trade and trade linked to global value chains. Using new data on policy uncertainty for 18 countries and 24 years, it finds a statistically significant negative impact of policy uncertainty on overall trade growth. A 1% increase in uncertainty is associated with a 0.02% point reduction in the growth of goods and services trade—which implies that the increase in policy uncertainty since mid-2018 may have caused a 1% point decline in world trade growth. The paper also finds that the impact of policy uncertainty on trade that is linked to global value chains is similar to overall trade. This is likely to be the result of two opposing forces: Global value chains are more dependent on relation-specific investments that are sensitive to policy uncertainty; but these investments also make trade patterns sticky. More research and better data are needed to disentangle these different effects empirically.
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The Russian Federation and Mexico behave as outliers; therefore, we exclude them from all specifications. We also exclude India and the Republic of Korea, for which we do not have data on the REER.
Data on services import volumes are not reported separately by any international organization. Therefore, we do not run a separate regression for services import volumes.
The intensity of impact may, of course, differ across sectors depending on the importance of up-front investments, but we have little data on these differences.
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We would like to thank Bernard Hoekman and Lawrence J. White for detailed comments. The findings, interpretations, and the conclusions that are expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
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Constantinescu, C., Mattoo, A. & Ruta, M. Policy Uncertainty, Trade and Global Value Chains: Some Facts, Many Questions. Rev Ind Organ (2020). https://doi.org/10.1007/s11151-020-09772-0
- Economic policy uncertainty
- Trade growth
- Global value chains