Trade Policy Dynamics: Evidence from 60 years of US-China Trade; Dr. Shafaat Yar Khan

Abstract

We study the growth of U.S. imports from China, from autarky during 1950--1970 to 15 percent of overall imports in 2008, taking advantage of the rich heterogeneity in trade policy and trade growth across products during this period. Central to our analysis is an accounting for the dynamics of trade, trade policy, and trade-policy expectations: we isolate the effects of uncertainty about future reforms from the lagged effects of past reforms. First, we document that the conventional measure of U.S.-China trade policy uncertainty---the amount that tariffs would have risen if China's Normal Trade Relations (NTR) status was revoked---also captures the lagged effects of the large trade liberalization that occurred when this status was first granted in 1980. Second, we estimate a path of trade-policy expectations using a multi-industry, heterogeneous-firm model with a dynamic export participation decision. We find that being granted NTR status in 1980 was largely a surprise and that this reform initially had a high probability of being reversed. The likelihood of reversal dropped considerably during the mid 1980s, however, and changed little throughout the late 1990s and early 2000s despite China's accession to the World Trade Organization (WTO) in 2001.