The Dynamic Effects of Regional Trade Policy Uncertainty

Abstract

The 2018 US–China trade war raised trade policy uncertainty (TPU) and triggered a prolonged US downturn, but China's experience remains unclear. We construct a novel provincial TPU indicator combining sectoral tariff volatility with provincial import composition, using data from 2015–2024. Surprisingly, provinces more exposed to tariff volatility shocks show above-average real GDP growth in the first year, driven mainly by machinery and electrical products, but experience sharply negative GDP, employment, and wage growth thereafter. These findings remain robust across alternative specifications, and high- versus low- TPU provinces respond differently. We propose a concise theoretical explanation for this two-stage response.