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November 2012

Uncertainty and the Wait-and-See Effects on Trade

Daria Taglioni's picture

If your job were suddenly in jeopardy, and you couldn’t predict next month’s income, you might put off buying that new car you had been eyeing. Similarly, an appliance company faced with sudden hardship among its customer base might delay building a new refrigerator-manufacturing plant. It turns out that uncertainty affects international trade flows, too. In a working paper published by the World Bank’s International Trade Department, we explore how that uncertainty hurts some types of trade more than others.

Our recent working paper, “Innocent bystanders: How foreign uncertainty shocks harm exporters,” is an attempt to address a shortcoming in scholars’ ability to anticipate the trade-related impacts of crises. In 2008, for example, trade economists failed to predict the drop in international commerce that followed the collapse of Lehman Brothers, an event that shook the global financial system. More recently, trade economists have failed to capture the full impact of the European debt crisis on exporters across the globe. While models and simulations have been getting better, the impacts of such shocks on trade are still poorly understood. Our research explores a theory that places exceptional uncertainty at the beginning of a chain-reaction that ultimately slows trade.