Market Uncertainty and International Trade
49 Pages Posted: 22 Nov 2019 Last revised: 8 May 2021
Date Written: September 1, 2019
We study the consequences of market uncertainty on international trade. An increase in foreign market uncertainty dampens China's aggregate exports on both the extensive and intensive margins. The adverse effects are more pronounced in industries facing tighter financial constraints than in others. We propose a dynamic trade model to explain the facts. Greater uncertainty depresses a firm's expected value of exporting and borrowing capacity, leading to fewer exporters and a smaller average size of exports. Under calibrated parameters, the uncertainty shock accounts for a sizeable fraction of China's trade collapse in the 2008 financial crisis and the recent trade war.
Keywords: Market Uncertainty, Trade Collapse, Financial Constraint, Extensive Margin, Intensive Margin
JEL Classification: F10, F41, F44
Suggested Citation: Suggested Citation