The Heterogeneous Effects of Uncertainty on Trade

IMF Working Papers, July 9, 2024

Source details

Empirical analysis using a gravity model for 143 countries over the 1980-2021 period.
Bilateral trade outcomes are the primary dependent variables examined.
Sectoral analysis distinguishes fuel and industrial products from other sectors.
Examination of uncertainty originating from both exporting and importing countries.
Investigation of trade integration measures: horizontal integration (deeper trade integration) and vertical integration (participation in global value chains).
Analysis considers the role of geopolitical tensions and heterogeneity across income levels, regions, and resource endowment.

General effect:
- Uncertainty has a negative impact on trade.
- A one standard deviation increase in global uncertainty is associated with a decline in bilateral trade by 4.5 percent.
Sectoral impacts:
- Fuel and industrial products trade are the most impacted sectors.
Direction of uncertainty:
- Negative impact is observed for uncertainty on both sides of the border.
- There is a higher impact of uncertainty from the importing country than from the exporting country.
Trade-integration mechanisms:
- Deeper trade integration (horizontal integration) mitigates the negative impact of uncertainty on trade.
- Higher participation in global value chains (vertical integration) amplifies the negative effect of uncertainty on trade.
Geopolitical context:
- Geopolitical tensions amplify the deterrent effect of uncertainty on trade.

By income group:
- Uncertainty has a negative impact on bilateral trade between Emerging Markets and Developing Economies and Advanced Economies.
By region:
- Africa and Europe’s intraregional trade decrease as uncertainty surges.
By resource endowment:
- Non-resources-rich countries are more at risk from the negative trade effects of uncertainty.

Policies that strengthen horizontal trade integration may help mitigate the negative effects of uncertainty on trade.
High participation in global value chains can increase vulnerability to uncertainty; policymakers should consider resilience measures for vertically integrated production networks.
Managing geopolitical tensions and reducing sources of uncertainty in importing countries could have outsized benefits for bilateral trade volumes.
Regional and country-specific vulnerabilities (Africa, Europe, non-resources-rich countries) suggest targeted policy responses to shield intraregional trade and at-risk economies from uncertainty shocks.

Source: The Heterogeneous Effects of Uncertainty on Trade (IMF Working Paper No. 2024/139).