This paper first theoretically analyzes that Economic Policy Uncertainty （EPU） will inhibit trade from three sources: sunk costs, actual demands, and expectations. Then, based on the traditional gravity model, it introduces EPU to the model and uses country-pair quarterly data to empirically study the extent of the trade impact of EPU, and further discusses whether there are differences in the degree of influence of EPU on trade under different conditions. The conclusions of this study are as follows: （1） The absolute value and growth of EPU both have an adverse impact on the trade scale, but the impact of exporter’s EPU index is insignificant; （2） EPU’s inhibitory effect on trade is related to macroeconomic status of importers, especially in countries with high unemployment; （3） There is a threshold effect of EPU on trade, and the marginal effect is significantly larger at a high level of EPU than at a low level of EPU. The conclusions of this paper provide important inspirations for the stable growth of global trade: under the current situation of relatively low growth of international trade, reducing the level of EPU is an important way to achieve stable growth of global trade and overcome existing difficulties. Besides, the international community should attach great importance to the detrimental effects of EPU on trade and adopt effective measures to reduce EPU. Specifically, countries should firmly oppose the " reverse globalization”, and strengthen the coordination of international economic policies and jointly safeguard multilateral cooperation mechanisms. The contributions of this paper are as follows: First, a relatively comprehensive mechanism of EPU’s impact on trade is proposed. This paper believes that as a broader measurement of policy uncertainty, EPU may not only affect the sunk costs of trade and entry and exit decisions, but also affect the scale of external demand facing traders and the expectations of traders. Second, through country-pair data, this paper empirically analyzes the trade inhibition effect of EPU, and points out that the impact of EPU has a non-linear characteristic, and the degree of its influence depends on both the macroeconomic status and the degree of EPU itself. Third, the conclusions of the study have strong policy implications. This study not only provides a new explanation for the low-speed growth of global trade in recent years from the perspective of EPU, but also provides more theoretical basis for countries to strengthen the policy cooperation and maintain the multilateral system.
Economic Policy Uncertainty and Low Growth of International Trade: An Analysis based on the Gravity Model
Journal of Finance and Economics Vol. 44, Issue 07, pp. 60 - 72 (2018) DOI:10.16538/j.cnki.jfe.2018.07.005
 Chen G J, Wang S Q. How does economic policy uncertainty influence corporate investment behavior?[J]. Finance and Trade Economics, 2016, (5): 5-21. (In Chinese)
 Anderson J E, van Wincoop E. Gravity with gravitas: A solution to the border puzzle[J]. The American Economic Review, 2003, 93(1): 170-192.
 Anderson J E. The gravity model[J]. Annual Review of Economics, 2011, 3(1): 133-160.
 Baker S R, Bloom N, Davis S J. Measuring economic policy uncertainty[J]. The Quarterly Journal of Economics, 2016, 131(4): 1593-1636.
 Bergstrand J H. The gravity equation in international trade: Some microeconomic foundations and empirical evidence[J]. The Review of Economics and Statistics, 1985, 67(3): 474-481.
 Bernanke B S. Irreversibility, uncertainty, and cyclical investment[J]. The Quarterly Journal of Economics, 1983, 98(1): 85-106.
 Bloom N. The impact of uncertainty shocks[J]. Econometrica, 2009, 77(3): 623-685.
 Bown C P, Crowley M A. Import protection, business cycles, and exchange rates: Evidence from the great recession[J]. Journal of International Economics, 2013, 90(1): 50-64.
 Campa J M. Exchange rates and trade: How important is hysteresis in trade?[J]. European Economic Review, 2004, 48(3): 527-548.
 Das S, Roberts M J, Tybout J R. Market entry costs, producer heterogeneity, and export dynamics[J]. Econometrica, 2007, 75(3): 837-873.
 Dixit A. Entry and exit decisions under uncertainty[J]. Journal of Political Economy, 1989, 97(3): 620-638.
 Fally T. Structural gravity and fixed effects[J]. Journal of International Economics, 2015, 97(1): 76-85.
 Handley K. Exporting under trade policy uncertainty: Theory and evidence[J]. Journal of International Economics, 2014, 94(1): 50-66.
 Handley K, Limão N. Trade and investment under policy uncertainty: Theory and firm evidence[J]. American Economic Journal: Economic Policy, 2015, 7(4): 189-222.
 Hansen B E. Threshold effects in non-dynamic panels: Estimation, testing, and inference[J]. Journal of Econometrics, 1999, 93(2): 345-368.
 Head K, Mayer T. Gravity equations: Workhorse, toolkit, and cookbook[A]. Gopinath G, Helpman E, Rogoff K. Handbook of international economics[C]. Amsterdam: North Holland Press, 2014.
 Heid B, Larch M. Gravity with unemployment[J]. Journal of International Economics, 2016, 101: 70-85.
 Kilian L. Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market[J]. The American Economic Review, 2009, 99(3): 1053-1069.
 Melitz M J. The impact of trade on intra-industry reallocations and aggregate industry productivity[J]. Econometrica, 2003, 71(6): 1695-1725.
 Nguyen D X. Demand uncertainty: Exporting delays and exporting failures[J]. Journal of International Economics, 2012, 86(2): 336-344.
 Novy D, Taylor A M. Trade and Uncertainty[R]. NBER Working Paper No.19941, 2014.
 Roberts M J, Tybout J R. The decision to export in Colombia: An empirical model of entry with sunk costs[J]. The American Economic Review, 1997, 87(4): 545-564.
 Stokey N L. Wait-and-see: Investment options under policy uncertainty[J]. Review of Economic Dynamics, 2016, 21: 246-265.
Cite this article
Xu Ruixiang, Xu Xiangyun, Shi Yu. Economic Policy Uncertainty and Low Growth of International Trade: An Analysis based on the Gravity Model[J]. Journal of Finance and Economics, 2018, 44(7): 60-72.
Previous: A Study on Ripple Effect of Stock Prices:From the Perspective of Firm Investment Decisions