Trade now a top source of policy uncertainty

Howard R. Gold | Dec 17, 2019

Trade tensions have helped drive global policy–related uncertainty to new highs, according to Chicago Booth’s Steven J. Davis. “Trade policy under the Trump administration also has a capricious, back-and-forth character that amplifies uncertainty and undermines a rules-based trading order,” writes Davis.

Policy uncertainty is measured in indices created by Northwestern’s Scott R. Baker, Stanford’s Nicholas Bloom, and Davis. They launched the US Economic Policy Uncertainty (EPU) Index in 2013, recording and tracking the use of key terms in influential newspapers to measure uncertainty in the public consciousness and the markets. They have since introduced policy uncertainty indices for 25 countries, as well as more-specialized uncertainty indices focusing on immigration and trade. (The indices are posted and updated on a website,

Traders and investors use the CBOE Volatility Index, or VIX, to track fear and risk in markets, but the VIX measures only uncertainty on Wall Street, not in the overall economy, where too much uncertainty can cause business executives to hold off on capital investments and hiring.

The researchers’ policy indices have risen sharply several times in the past decade: during the 2008–09 financial crisis, the European debt crisis and the 2011–12 US debt-ceiling crisis, the June 2016 Brexit referendum, and the US election of President Trump that November.

More recently, trade policy conflicts have caused several indices to spike. The average US tariff rate, Davis notes, was less than 2 percent in December 2017 and was expected to rise to as high as 9–11 percent by the end of 2019, if all the threatened additional tariffs were implemented. The average US tariff rate on Chinese imports was projected to reach as high as 21.4 percent, but the recently announced “phase one” trade deal will reduce some US tariffs on Chinese imports. 

“Under Trump, tariffs are threatened, announced, delayed, reversed, announced again, imposed, and removed—often in quick succession,” Davis writes. “Some countries get tariff exemptions, [and] some don’t. Exemptions vary in duration, and they come and go in a head-spinning manner.

“These various developments have led to a tremendous upsurge in anxiety and uncertainty about trade policy and its economic fallout,” Davis sums up.

In August, amid rising trade tensions, the US EPU index shot above 285, higher than it was after Brexit, Trump’s election, the US debt-ceiling crisis, and the September 11, 2001, terrorist attacks. 

That same month, the global EPU index spiked to 348, a 20-year high. Besides responding to trade, the index registered uncertainty following continued conflict over Brexit; increased unrest in Italy, France, and Turkey; and an economic slowdown in China. 

The US Trade Policy Uncertainty Index hit a 25-year high in June but remained far short of the level it reached in November 1993, at the height of the debate over the North American Free Trade Agreement (NAFTA). Meanwhile, trade policy was cited as a factor in 26 percent of articles about equity market volatility from March to December 2018. From 1985 through 2015, it was mentioned in just 3 percent of articles about EMV. “Trade policy went from a virtual non-factor in US equity market volatility in recent decades to one of its leading sources in 2018,” writes Davis.

“US and global policy uncertainty have been highly elevated in recent years,” he concludes. “The huge rise in trade policy uncertainty since early 2018 is an extraordinary departure from recent history, as is the prominent role of trade policy in recent stock market volatility.”