Does uncertainty matter for trade flows of emerging economies?

Abstract

Uncertainty shocks have been shown to affect the real economy, but uncertainty remains about their trade effects and whether effects are similar across different types of uncertainty. We investigate how global economic, financial, and trade policy uncertainty affect the trade flows of the seven largest emerging economies (EM-7) using a panel structural vector autoregressive model. We find that: (1) Global economic and trade policy uncertainty shocks induce a protracted decline of about 4 to 5% in EM-7’s imports and exports. (2) Global economic and trade policy uncertainty act as trade barriers, reducing the EM-7’s degree of openness and their trade balance to GDP ratio. (3) Financial uncertainty only has a short-term impact on EM-7’s trade flows. (4) Trade policy uncertainty is the most important type of uncertainty affecting trade flows, explaining 11% of the variation in trade flows.