THE IMPACT OF TRADE POLICY UNCERTAINTY ON THE INTENSIVE AND EXTENSIVE MARGIN OF TRADE: THE CASE UNDER WORLD TRADE ORGANISATION (WTO)

This paper studies the impact of trade policy uncertainty on the intensive and extensive margin of trade. Since most of the world trade occurs under the principles of World Trade organisation(WTO) trading system, this research aims to study the extent to which uncertainty prevails under World Trade Organisation(WTO) and how that affects firm entry and export decisions. Despite its apparent importance, this topic of research is largely unassessed and this paper employs novel methods gauge the impact. The primary dataset this paper employs is four-dimensional trade data from exporter dynamics database. In addition, to ensure the robustness to the sample selection, aggregation level and methodology this paper also uses disaggregated HS 6-digit product level data. Trade policy uncertainty is operationalised by binding overhang under the most favoured nation(MFN) tariffs. The analytical technique used is fixed effects and linear probability (regression) model. The results of binding overhang on the extensive margin are suggestive of a negative causal impact whereas, results of the intensive margin remain mixed and inconclusive.