How Trade Policy Affects Uncertainty

Whether governments, or groups of governments, will raise or lower tariffs, ban the import or export of certain goods, or set new standards for carbon emissions makes industries, companies, and individuals worry about the cost and availability of goods now and in the future.

Measuring this is somewhat easier than gauging other types of uncertainty. Every time a good crosses a border we collect data on its origin, destination, value, and, most importantly, how much it’s taxed, says the University of Michigan’s Kyle Handley, who studies how trade policy and uncertainty affect firms. “Trade-policy uncertainty is very informative really for all studies of uncertainty because it is completely quantifiable. It can provide insights for things like investment-tax credits for wind power, new estate taxes, and the like, things for which we might not have good data.”

We are at a particularly uncertain time in trade policy, he says. The recession aggravated a longstanding and worsening global trade imbalance, and the World Trade Organization’s Doha Rounds, which launched in 2001 and are perceived to be the solution, have yet to be concluded. Their aim is to overhaul the international trading system through lowering trade barriers and rewriting trade rules.

“Until those negotiations are settled, there is a lot of scope for countries to increase tariffs without violating WTO rules. As a result, countries have pushed ahead with regional and bilateral agreements, which are good for the countries involved, but if you are outside the group, you don’t have the same market access as competitors,” Handley says.

Countries within these agreements are becoming less committed to concluding the WTO negotiations as their situations work well without the help of the international organization. But the possibility that the negotiations will be settled leads to uncertainty over timing and future tariff levels both in countries with trade agreements and those without.