Does Trade Policy Uncertainty Affect Global Economic Activity?



Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo | FEDS Notes, Washington, Board of Governors of the Federal Reserve System

Trade negotiations and proposals for a new approach to trade policy have become the focus of increased attention among investors, politicians, and market participants. While it is possible that negotiations will eventually lead to a more open and fair global competitive landscape, developments so far have resulted in an increase in uncertainty about the outlook for global trade. Higher uncertainty could lead firms to delay their investment and reduce their hiring, lower consumer confidence and spending, and ultimately curtail economic activity around the world.

In this note, we first document the recent rise in trade policy uncertainty, henceforth TPU, by using two complementary measures based on text-search analysis: one focusing on newspapers articles, and another constructed from transcripts of firms’ earnings calls. We then use econometric evidence on the joint movements in aggregate TPU, industrial production, and other macroeconomic and financial variables in order to provide an estimate of the effects of the recent spikes in TPU on U.S. GDP, as well as GDP in advanced foreign economies (AFEs) and emerging market economies (EMEs).

We find that the rise in TPU in the first half of 2018 accounts for a decline in the level of global GDP of about 0.8 percent by the first half of 2019. Had trade tensions not escalated again in May and June 2019, the drag on GDP would have subsequently started to ease. However, renewed uncertainty since May of 2019 points to additional knock-on effects that may push down GDP further in the second half of 2019 and in 2020.

The Fed - Does Trade Policy Uncertainty Affect Global Economic Activity_


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