An important question is whether economic policy uncertainty affects global value chain (GVC) related trade more than other trade. There are contrasting effects which play out over time because GVC trade requires larger upfront relation-specific sunk investments and is concentrated in capital intensive sectors. These investments make GVC trade flows stickier and less responsive to any change in the environment, including economic policy uncertainty. However, since economic policy uncertainty affects investment choices, it should eventually have larger effects on GVC trade compared to other trade. These effects are confounded by the fact that consumer and producer investment goods are typically produced through longer GVCs. Trade in these investment goods is likely to be more sensitive to demand for investment which is affected by policy uncertainty. The combination of these forces determines whether economic policy uncertainty affects GVC trade differently from other trade.

We conduct a panel estimation covering 18 countries over 24 years. Our results, which are robust across a wide range of specifications, suggest a statistically significant negative impact of policy uncertainty on trade growth. A 1 percent increase in uncertainty is associated with a 0.02– percentage point reduction in goods and services trade volume growth. For example, based on these estimates, the increase in economic policy uncertainty since mid-2018 may have caused a 1 percentage point decrease in world trade growth. The finding is robust to focusing on subcategories of trade and employing different specifications. GVC trade appears to be as sensitive to uncertainty as non GVC trade.

Looking at the impact on components of trade may help illuminate the economic channels through which policy uncertainty affects trade. We find that economic policy uncertainty negatively affects imports of capital goods, imports of non-durable consumer goods as well as imports used to produce exports. These findings are consistent with the view that economic policy uncertainty reduces trade growth by reducing foreign firms’ incentives to invest in serving the market, by inducing consumers’ precautionary saving and by affecting firms that are part of global value chains.

The implication of this result is that economic policy uncertainty has contributed to the sluggishness in world trade growth in recent years. However, its consequences for global value chains are less clear. We find that trade linked to GVCs responds to economic policy uncertainty in a way that it is broadly similar to overall trade. As discussed above, this could be the result of opposing forces linking uncertainty to GVC trade. In the long term, we would expect the negative forces to dominate as economic policy uncertainty would induce firms to withhold investments today that would promote GVC trade tomorrow.

We also look at trade policy uncertainty, which has been an important component of economic policy uncertainty in recent times. We rely on the work of Ahir et al. (2019) that builds on the EPU index methodology to include trade-related keywords and construct a world trade uncertainty (WTU) index. The index documents the large increase in trade policy uncertainty since 2017. But when we use the WTU index in our econometric analysis, we do not find a consistent negative effect of trade policy uncertainty on overall and GVC trade. Rather, this effect varies by country and is at times negative and at times positive.

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