This puzzling result depends on two main factors. First, the measure of trade policy uncertainty is based on the presence of the words “uncertainty” and “trade” in proximity within press articles. This approach does not allow us to distinguish between different types of uncertainty which could have different effects on trade. Specifically, whether the trade policy uncertainty is “negative”, about the implementation of tariff increases, or “positive,” as about the conclusion of a new trade liberalization agreement. Second, the measure fails to distinguish between whether the trade policy uncertainty measure for a specific country relates to its policies vis-à-vis all other countries or specific countries. Threats of escalating tariffs solely on trade between the US and China increase policy uncertainty worldwide. But its impact on US-China trade could be very different from the effect on trade between the US (or China) and third parties, which may benefit from uncertaintyinduced trade diversion.

The rest of the paper is organized as follows. Section 2 reviews the existing literature on policy uncertainty. Section 3 presents the empirical strategy. Section 4 discusses the key results using the economic policy uncertainty index, while the trade policy uncertainty index is used in Section 5. Concluding remarks follow.

# **2. Literature on policy uncertainty and trade**

There is a large body of theoretical and empirical work that studies the impact of uncertainty, and of policy uncertainty, on growth and other macroeconomic variables. For example, Bernanke (1983) noted that high uncertainty can induce firms to delay investment and hiring when it is costly to undo investment projects or to hire and fire workers. Precautionary spending cuts by households and an increase in the cost of finance are also reasons why uncertainty has a dampening effect (Pastor and Veronesi, 2013).

Baker et al. (2016) provide a new measure of policy uncertainty based on newspaper coverage frequency and study the impact of this index on output, investment and employment. In a panel VAR setting for 12 large economies, they find that increases in policy uncertainty negatively affect these variables. In line with this finding, recent work at the World Bank documents the link between policy uncertainty and investment for emerging markets and developing economies (World Bank, 2017).

Hlatshwayo (2018) unpacks policy uncertainty by type of policy to distinguish generic, fiscal, monetary and trade policy uncertainty. Utilizing the latter index, Ebeke and Siminitz (2018) find an average decline of 0.8 percentage points in the investment-to-GDP ratio for five quarters following a one-standard-deviation increase in the level of trade uncertainty.

Ahir et al. (2018) develop a world uncertainty (WU) index that captures uncertainty related to economic and political developments in the short and long run. The WU index is compiled for a large set of developed and developing countries starting from 1996, by counting the occurrences of the word “uncertainty” in the quarterly Economist Intelligence Unit (EIU) country reports. Ahir et al. (2018) use this index to demonstrate that increases in uncertainty foreshadow significant 4