Understanding the asymmetric impact of non-fundamental behavioral shocks on trade efficiency: Evidence from China's trade partners

Abstract

Recent global events and trade tensions have significantly impacted international trade dynamics, yet the role of non-fundamental behavioral shocks in shaping trade relationships remains understudied, particularly for major trading nations like China. This study investigates the impact of policy uncertainty and inflation expectations on China's trade efficiency. Using smoothed instrumental variable quantile regression (SIVQR) on a panel dataset of 24 trade partners from 1960 to 2023, we find that policy uncertainty indicators negatively affect China's trade efficiency only at lower to middle quantiles (10th to 60th), while inflation expectations show positive impacts particularly at higher quantiles. Our findings indicate that more efficient trade partners demonstrate higher resilience to policy uncertainty shocks, and this negative effect is more pronounced post-global financial crisis but less severe under free trade agreements, especially in the Asia-Pacific region. Our results are robust to alternative measures of policy uncertainty and alternative statistical techniques. To enhance trade efficiency and resilience, policymakers should prioritize implementing effective risk management strategies while fostering stronger partnerships with more efficient counterparts.