Trade and Investment under Policy Uncertainty: Theory and Firm Evidence

Publisher： American Economic Association

E-ISSN： 1945-774X|7|4|189-222

ISSN： 1945-7731

Source： American Economic Journal: Economic Policy, Vol.7, Iss.4, 2015-11, pp. : 189-222

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Abstract

In a dynamic model with sunk export costs, a firm's export investment is lower under trade policy uncertainty, and credible preferential trade agreements (PTAs) increase trade even if current tariffs are low. Exploring Portugal's accession to the European Community as a policy uncertainty shock we find that the trade reform accounted for a large fraction of Portuguese exporting firms' entry and sales; the accession removed uncertainty about future EC trade policies; and this uncertainty channel accounted for a large fraction of the predicted growth. Our approach can be applied to other PTAs and sources of policy uncertainty.