level of institutions in the regressions. The Worldwide Governance Indicator database is used to measure the quality of institutions across countries.

Results on the interaction term between TPU and three different indicators of institutional quality -rule of law, regulatory quality and control of corruption are reported in Table 5. The coefficients of the interaction terms are all are positive and statistically significant for the extensive margin of trade, meaning that the negative effect of water on export participation is attenuated for countries with better institutions. For the intensive margin of trade, the interaction between the quality of institutions and the water coefficient is not significant.

# **6. Trade Policy Uncertainty and Product Characteristics**

The impact of trade policy uncertainty can be magnified by global value chains (GVCs). Yi (2003) shows that tariffs and non-tariff measures matter more in GVCs, because in GVC goods cross borders multiple times and each time they do so, they incur the cost of the trade barrier they face. Following the same logic, TPU should have a stronger negative effect in the export margins of intermediate goods inputs used for further processing. Papers such as Harrigan and Venables (2006) also show that uncertainty is an important obstacle to trade when production takes place in global supply chains: it is a source of agglomeration when production is fragmented.<sup>17</sup> To test whether TPU has an amplified impact in the presence of GVCs, an interaction between water and a dummy that identifies the sectors involved in GVCs is included in the regression. The dummy is equal to one for parts and components defined as the Standard International Trade Classification (SITC Rev.3) equivalent of Broad Economic Categories (BEC) parts and components plus unfinished textiles in SITC section division 65.<sup>18</sup> Results are presented in column 1 and 4 of Table 6. The coefficients of water and log tariff are still negative and significant. At the average tariff, a decrease in the applied tariff of one percentage point increases in the probability of trade by 11.2 points. Water elimination for non-intermediate products is associated with an increase in the probability to export of 5.3%. The coefficient of the interaction term is also negative and significant, implying that intermediate goods are more sensitive to trade policy uncertainty. A 100% reduction in water increases the probability of exporting parts and components by around 7%.

Next, it is investigated whether the TPU effect varies across products that are more or less differentiated. There is no prior expectation about the difference between homogeneous and differentiated goods. A trade-off between at least two mechanisms is at play. On the one hand, homogeneous goods are more sensitive to changes in prices. This would suggest that homogenous goods are also more sensitive to uncertainty. Conversely, providers of standardized goods can more easily redirect their supply of 17 The authors focus on uncertainty in time costs but a similar logic could be applied for uncertainty in trade policy. 18 Product nomenclatures have then been converted using the conversion tables prepared by the UN Statistics Division.

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