Trade under trade policy uncertainty: The moderating roles of US preferential trade agreements and their heterogenous effects

Abstract

We examine the moderating role of US Preferential Trade Agreements (PTAs) in the trade effects of Trade Policy Uncertainty (TPU) using disaggregated at 2-digit product-level data from 1995 to 2020. Our analysis reveals several key insights. First, US PTAs alleviate the adverse effects of trade policy uncertainty on bilateral exports to the United States. The results indicate that exporters with no trade agreements with the US endure the full effects of TPU, while their counterparts with trade agreements experience a significant reduction in adverse effects. Specifically, we note that in the absence of any trade agreements between the US and its trading partners, the elasticity of exports to the US with respect to TPU is between−0.03 and −0.05. Second, we observe substantial heterogenous uncertainty-reducing effects of US PTAs across income groups. The moderating role of US trade agreements appears to be most effective in low-income and lower-middle-income countries, while it is non-existent for upper-middle- and high-income countries. Finally, we uncover that the content of provisions embedded in the PTAs significantly matters to the extent of the expected moderating role of PTAs. These insights contribute to the broader understanding of trade policy's role in shaping international trade patterns and offer practical implications for policymakers and trade negotiators.