The Heterogeneous Effects of Uncertainty on Trade

Abstract

This paper explores the relationship between uncertainty and trade by employing a gravity model across 143 countries from 1980 to 2021. The results confirm that uncertainty generally negatively impacts trade. Specifically, a one-standard-deviation increase in global uncertainty is associated with a 2.6% decline in bilateral trade, with the trade of mineral fuels being the most affected. The article delves deeper into the analysis, revealing that greater horizontal trade integration can mitigate the negative effects of uncertainty on trade. Additionally, we find that geopolitical tensions exacerbate the deterrent effect of uncertainty on trade. The findings also highlight heterogeneity across economic development levels: (a) uncertainty negatively affects bilateral trade between Emerging Markets and Developing Economies and Advanced Economies; however, (b) at the regional level, intra-regional trade (e.g., intra-Africa and intra-Asia) decreases as uncertainty rises.