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Trade uncertainty is at its highest point on record

The unpredictable outlook appears to be dragging down global growth




UNCERTAINTY IS a sort of poison for the global economy. Without knowing what lies ahead, firms delay making potentially profitable investments and hiring new workers. As President Donald Trump’s trade wars have escalated, economists have attempted to estimate how much uncertainty has risen—and to what extent it may be dragging down economic growth.

The latest such measure comes from Hites Ahir and Davide Furceri of the International Monetary Fund and Nick Bloom of Stanford University. To get a consistent measure of uncertainty over time, they scour country reports from the Economist Intelligence Unit, a sister company of The Economist. The more often a report mentions “uncertain”, “uncertainty” or “uncertainties” near a trade-related word, the higher the index value.

The results show that this measure remained low and stable for decades. Despite the collapse in trade around the time of the global financial crisis, uncertainty did not rise, perhaps because world leaders pledged not to resort to protectionist measures.

In recent years, however, trade uncertainty has surged, particularly in advanced economies.

Although it rose a little after Mr Trump’s election, it was only after he imposed tariffs on China that uncertainty fully blossomed. It rose in the third quarter of 2018 (the first round of tariffs was imposed in July 2018) and then fell in the fourth quarter because of an apparent truce between American and Chinese trade negotiators. This year the measure has climbed to unprecedented heights (see chart).

This has no doubt harmed the global economy. The authors reckon that the rise in trade uncertainty in the first quarter of 2019 may have dragged down global growth by as much as 0.75 percentage points. A separate study by economists at the Federal Reserve comes to a similar conclusion. Of course the world has seen very few episodes of this sort. And so, appropriately enough, the economists note that their estimates are uncertain.

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