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Trade Policy Uncertainty and World Uncertainty

Summary:
If measured world uncertainty shocks cause decelerating economic growth, then Trump will be partly responsible for the global slowdown the IMF is forecasting. Economic policy uncertainty in the US, as measured by the Baker, Bloom and Davis has been elevated since the election, although not as much as one might think. But one component has been strikingly elevated: trade policy uncertainty. Figure 1: Categorical economic policy uncertainty (blue) and trade policy uncertainty (red). NBER defined recession dates shaded gray; Trump administration shaded orange. Source: policyuncertainty.com and NBER. Consider the pattern of US trade policy uncertainty movements and world uncertainty. Figure 2: Categorical  trade policy uncertainty (red) and world uncertainty. NBER defined recession dates

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If measured world uncertainty shocks cause decelerating economic growth, then Trump will be partly responsible for the global slowdown the IMF is forecasting.

Economic policy uncertainty in the US, as measured by the Baker, Bloom and Davis has been elevated since the election, although not as much as one might think. But one component has been strikingly elevated: trade policy uncertainty.

Trade Policy Uncertainty and World Uncertainty

Figure 1: Categorical economic policy uncertainty (blue) and trade policy uncertainty (red). NBER defined recession dates shaded gray; Trump administration shaded orange. Source: policyuncertainty.com and NBER.

Consider the pattern of US trade policy uncertainty movements and world uncertainty.

Trade Policy Uncertainty and World Uncertainty

Figure 2: Categorical  trade policy uncertainty (red) and world uncertainty. NBER defined recession dates shaded gray; Trump administration shaded orange. Source: policyuncertainty.com and NBER.

US trade policy uncertainty Granger causes world uncertainty (i.e., can reject the null of non-precedence at the 10%). world uncertainty does not appear to Granger cause US trade policy uncertainty.

My guess is that with US retaliation in the Airbus dispute, worries about USMCA, and anxieties over the automobile Section 232, trade policy uncertainty is unlikely to drop substantially.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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