Trade Policy Ambiguity

This paper studies how Knightian uncertainty about the distribution of future trade policies affects current trade flows using a dynamic trade model with a sunk cost of exporting. Qualitatively, trade-policy ambiguity reduces export participation in a similar manner to standard trade-policy risk, but also increases sensitivity to tariff bounds, decreases sensitivity to the likelihood of a tariff increase, and can either increase or decrease sensitivity to tariff persistence. Quantitatively, ambiguity dampens the response of trade to persistent reforms and strengthens the response to transitory reforms