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In this paper we seek to answer the question of how the patterns of bilateral trade are altered by rising trade policy uncertainty (TPU). Specifically, we investigate whether geopolitical alignments between country pairs determine how bilateral trade flows react during periods of greater uncertainty. Using a structural gravity framework augmented with a text-based TPU index and a geopolitical distance measure based on UN General Assembly voting records, we find a significant negative effect of the latter when TPU is elevated, indicating a shift to trading among “friends” in uncertain times.

Macroeconomics --- Economics: General --- Exports and Imports --- Information, Knowledge, and Uncertainty: General --- Neoclassical Models of Trade --- Trade Policy --- International Trade Organizations --- International Relations and International Political Economy: General --- Empirical Studies of Trade --- Economic & financial crises & disasters --- Economics of specific sectors --- International economics --- Trade policy --- International trade --- Trade balance --- Plurilateral trade --- Trade tensions --- Trade barriers --- Currency crises --- Informal sector --- Economics --- Commercial policy --- Balance of trade

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Economic theory suggests that countries’ tariff commitments in trade agreements reflect their import market power at the time of negotiations. However, as countries grow, their market power in different sectors can change in unforeseen ways and their commitments may no longer reflect changed economic conditions. Using a newly built dataset of pre-Uruguay Round applied tariffs and relying on the theoretical framework of the terms-of-trade motive for trade agreements, we estimate hypothetical tariff commitments under current levels of market power and compare them with actual tariff commitments. We find that lower tariff commitments required to reflect current economic conditions would amount to a reduction in annual tariff costs of up to $26.4 billion – equivalent to nearly 10% of global tariff costs. Our results reveal substantial heterogeneity between countries and sectors. The sectors with the largest potential tariff cost reductions are vehicles (HS 87) and machinery and appliances (HS 84-85). Product-level tariff reductions would range from 0 to 18.5 percentage points and are on average largest for China. In the past, the GATT/WTO system has updated tariff commitments through periodic rounds of negotiations, and our findings support the revival of the WTO's negotiation function in this area.

Macroeconomics --- Economics: General --- Taxation --- Exports and Imports --- Neoclassical Models of Trade --- Trade Policy --- International Trade Organizations --- International Agreements and Observance --- International Organizations --- Trade: General --- Economic & financial crises & disasters --- Economics of specific sectors --- Public finance & taxation --- International economics --- Tariffs --- Taxes --- Imports --- International trade --- Trade policy --- Trade agreements --- Currency crises --- Informal sector --- Economics --- Tariff --- Commercial policy --- Commercial treaties --- Uruguay