In a dynamic model with sunk export costs, a firm's export investment is lower under trade policy uncertainty, and credible preferential trade agreements (PTAs) increase trade even if current tariffs are low. Exploring Portugal's accession to the European Community as a policy uncertainty shock we find that the trade reform accounted for a large fraction of Portuguese exporting firms' entry and sales; the accession removed uncertainty about future EC trade policies; and this uncertainty channel accounted for a large fraction of the predicted growth. Our approach can be applied to other PTAs and sources of policy uncertainty. (JEL D22, F12, F14, F15, G31, L11)
Handley, Kyle, and Nuno Limão.
"Trade and Investment under Policy Uncertainty: Theory and Firm Evidence."
American Economic Journal: Economic Policy,
Firm Behavior: Empirical Analysis
Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
Empirical Studies of Trade
Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
Production, Pricing, and Market Structure; Size Distribution of Firms