The Impact of Uncertainty on International Trade: A Case Study of The United States and Some Selected Trade Partners

In this paper, we researched the impact of uncertainty on international trade for the US and some selected countries of its top trade partners during the period of 1985-2020. The Bloom 2009 model was used with some changes, like using the Economic Policy Uncertainty index (EPU) as the uncertainty shock in a Vector Autoregression model (VAR). We used the VAR model for the United States with some of its top trade partners that are involved in a free trade agreement like Canada, Mexico, Singapore, and South Korea. Another VAR model for the United States with some Asian trade partners like China, India, and Japan, some European trade partners like France, Germany, Ireland, Italy, and the United Kingdom, and finally Brazil as the only South American trade partner in this study.
Our findings are that trading under a trade agreement as well as without a trade agreement led to the same trend of the impact of the uncertainty for both countries on the US imports from these countries and the US exports to these countries, but the impact on the US IPM has the opposite trend compared to the US EPU. However, the US EPU has the strongest magnitude on all variables in each case of study. It is worth mentioning that the impact of the Chinese EPU on the US IPM is stronger and more significant than the US EPU. In addition, the US EPU had an insignificant impact on the degree of openness, but there were some significant periods for the US IPM as a result of an increase in the US EPU. In a conclusion, trading under a free trade agreement or without a free trade agreement had an insignificant impact on the direction and the magnitude of the impact on the partners’ mutual trade.

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