Trade Uncertainty and Investment in the Euro Area

Abstract

We analyze the impact of trade policy uncertainty on investment in the euro area. Our identification strategy assumes that countries that are relatively more dependent on global trade networks exhibit a higher sensitivity of investment with respect to trade uncertainty. We find that the investment-to-GDP ratio is on average 0.8 percentage points lower for five quarters following a one standard deviation increase in the level of trade uncertainty. We demonstrate that these results are unlikely to be driven by omitted variables and that they are robust to different measures of trade uncertainty and trade openness. Our analysis suggests that the detrimental effect of trade tensions goes beyond lower trade growth, as uncertainty can reduce investment and the economy's long-term growth potential.

Keywords: Trade policy, International trade, Investment, Econometric models, trade tensions, uncertainty, trade openness, General, Criteria for Decision-Making under Risk and Uncertainty

JEL Classification: F13, D20, D81