New Index Tracks Trade Uncertainty Across the Globe


Tuesday, September 10, 2019    / 05:18PM / by Hites Ahir, Nicholas Bloom and Davide Furceri, IMFBlog / Header Image Credit: Nikada/Istock By Getty Images

Rising trade uncertainty is cited as a driving factor for "sluggish global growth" in the current issue of the IMF's World Economic Outlookwhich describes the state of the world economy.

But how is trade uncertainty measured? How has it evolved over time? Are changes in trade uncertainty confined to specific countries and regions of the world? A new measure of trade uncertainty finds that by this measure of uncertainty it is surging, and not just in the United States and China, where trade tensions are highest, but also in many other countries.

How We Built It

We construct the World Trade Uncertainty index for 143 countries starting in 1996. To the best of our knowledge, this is the first effort to create a trade uncertainty index for a large set of advanced and developing economies. Existing measures of trade uncertainty focus either on the United States (the trade component of Economic Policy Uncertainty index by Scott Baker, Nicholas Bloom, and Steven Davis), or on the global economy as a whole (the index of BlackRock), or on a set of 44 countries (indexes by Sandile Hlatshwayo).

Our new index is based on the Economist Intelligence Unit (EIU) country reports. These reports follow a standardized process and structure, which helps to mitigate concerns about accuracy, ideological bias, and consistency. Moreover, this single, highly reputable source has a specific topical focus for coverage-economic and political developments. These factors make our index comparable across countries.

To construct the index, we tally the number of times "uncertainty" is mentioned in the reports in proximity to a word related to trade. Specifically, for each country and quarter, we search EIU reports for the words "uncertain," "uncertainty," and "uncertainties" appearing near the following words: protectionism, North American Free Trade Agreement, tariff, trade, United Nations Conference on Trade and Development, and World Trade Organization. To make the WTU index comparable across countries, we scale the raw counts by the total number of words in each report. An increase in the index indicates that trade uncertainty is rising, and vice versa.

Global Trade Uncertainty Increasing

Globally, the trade policy uncertainty index is rising sharply, having been stable at low levels for about 20 years.

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The index shows increased uncertainty starting around the third quarter of 2018, coinciding with a heavily publicized series of tariff increases by the United States and China. It then declined in the fourth quarter of 2018 as US and Chinese officials announced a deal to halt the escalation of tariffs at the G-20 meeting in December in Buenos Aires. It significantly spiked again in the first quarter of 2019 following a substantial expansion of American tariffs on imports from China on March 1.

We also find that increases in uncertainty foreshadow significant output declines. Based on our estimates, the increase in trade uncertainty observed in the first quarter of 2019 could be enough to reduce global growth by up to 0.75 percentage point in 2019.

Elevated Trade Uncertainty Beyond US, China

Trade uncertainty has been increasing not only in the United States and China but also in many countries around the world.

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High levels of trade uncertainty have been recorded in key US trading partners such as Canada, Mexico, Japan, and large European economies, and in many other countries geographically close to the United States and China.

The level of trade uncertainty, however, varies significantly across regions and income groups. The recent rise in the uncertainty index has been felt the most in the Western Hemisphere, followed by Asia-Pacific and Europe.

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In contrast, trade uncertainty remains moderately low in the Middle East, Central Asia, and Africa. Advanced economies show the highest trade uncertainty, followed by emerging markets. While rising, trade uncertainty remains, on average, at low levels in low-income economies.

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The World Trade Uncertainty (WTU) index is part of a larger project to measure uncertainty around world. The WTU index is one of the components of the World Uncertainty Index (WUI) available here.

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