output declines with uncertainty innovations explaining about 3 percent of variation in GDP growth after 8 quarters based on a VAR model.

Most recently, adapting the WU index methodology to include trade-related keywords, Ahir et al. (2019) construct a world trade uncertainty (WTU) index based on which they show that trade uncertainty explains more than 70 percent of the increase in uncertainty in the first quarter of 2019 and also that the increase in trade uncertainty observed in the first quarter of 2019 could be enough to reduce global growth by up to 0.75 percentage points in 2019.

A number of recent studies focus specifically on the relationship between trade policy uncertainty and trade (Handley, 2014; Handley and Limao, 2015 and 2017; and Crowley et al., 2018). They find that trade policy uncertainty has a negative impact on international trade flows through different channels. Handley (2014) and Handley and Limao (2015) find that trade policy uncertainty delays firms’ entry into foreign markets. In particular, Handley and Limao (2015) structurally estimate the effect of policy uncertainty on firm entry following Portugal's accession to the European Community in 1986 and find that (i) the trade policy reform accounted for a large fraction of Portuguese exporting firms' entry and sales, (ii) the accession removed uncertainty about future EC trade policies, and (iii) this uncertainty channel accounted for a large fraction of the observed growth.

Handley and Limao (2017) have looked at China's accession to the WTO. This event was characterized by little or no change in the level of US import tariffs on goods from China, but involved a substantial reduction in uncertainty about what the US tariff rate on Chinese goods would be in the future. The study uses the elimination of pre-existing cross-sectional variation in tariff uncertainty that came with China's accession to identify the impact on trade flows. They find that this reduction in trade policy uncertainty can explain 22-30 percent of China's subsequent export growth to the US.

Crowley et al. (2018) provide the first empirical evidence that “tariff scares” – threats to raise tariffs in the future – have negative impacts on trade even when the threatened import tariff hikes never actually materialize. The analysis uses the universe of transaction-level Chinese customs data and focuses on the foreign market entry decisions of Chinese firms in response to antidumping duties imposed against China by 17 economies over 2000-2009. They study not how Chinese exports to a country fall when a country imposes a tariff, but rather how entry into new foreign markets by Chinese firms declines when other countries impose these special tariffs. They find that the average number of Chinese missing entrants because of tariff uncertainty per year is 1,718. The total number of missing entrants grew from 670 in 2001 to a peak of 2,920 in 2008.

Our paper complements this strand in the literature, because it examines the impact of economic policy uncertainty and trade policy uncertainty for a broad cross-section of major traders over a significant period of time, rather than for specific countries or specific episodes. Furthermore, previous work has not extended the analysis of economic policy uncertainty to encompass the recent trade slowdown.

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