Trade and Investment under Policy Uncertainty: Theory and Firm Evidence
- (pp. 189-222)
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. (JEL D22, F12, F14, F15, G31, L11)Citation
Handley, Kyle, and Nuno Limão. 2015. "Trade and Investment under Policy Uncertainty: Theory and Firm Evidence." American Economic Journal: Economic Policy, 7 (4): 189-222. DOI: 10.1257/pol.20140068Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- F12 Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F14 Empirical Studies of Trade
- F15 Economic Integration
- G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
- L11 Production, Pricing, and Market Structure; Size Distribution of Firms
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