International trade depends on past, present, and future trade policy. An extensive litera- ture studies the contemporaneous relationship between trade flows and trade policy, often summarized by a trade elasticity, while largely ignoring the effects of past or potential fu- ture trade policy.1 One recent strand of literature has focused on the transition from past reforms, while another has focused on the effect of uncertainty about future policy while assuming that the effects of past reforms have run their course. In this paper, we reconsider the interplay between the dynamics of trade policy and trade by studying the growth of China’s exports to the United States from 1971 to 2008, utilizing a new methodology that disentangles the effects of previous policy from the effects of uncertainty over future policy. Our approach simultaneously yields estimates of the dynamics of trade-policy expectations and the dynamics of the trade elasticity.
China’s integration into the world trading system, and the U.S. economy in particular, is ideally suited to the study of trade-policy dynamics. It started from autarky, as the United States maintained a complete embargo on Chinese imports from 1950 until 1971. From this initial no-trade steady state, two potentially unanticipated trade liberalizations occurred in 1971 and 1980.
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