SUMMARY :

A new study commissioned by the European Central Bank (ECB), published on 25 August, proposes a methodology to track the economic effects of unexpected trade policy announcements by analysing firm-level stock price reactions and their broader macroeconomic consequences. Using a novel dataset of daily official trade policy statements by the US and its key partners from 2007 to 2019, the research evaluates both liberalising and protectionist measures. The focus is on how sudden shifts in trade policy influence industrial production, trade flows, investment, and employment in the US economy.

More details :

Key findings reveal that liberalising policies—such as tariff reductions or new agreements—boost production, exports, and investment, while protectionist moves, such as tariff hikes, have equivalent negative effects. Importantly, these reactions are symmetric, meaning the damage from trade restrictions matches the benefits from opening markets. Market implementation, not just policy announcement, is essential for economic impact; firms and households often delay decisions amid uncertainty, weakening the immediate effect of mere announcements.

According to the study, trade shocks originating from US partners were found to have a larger negative impact on the US than those initiated by the US itself, underlining the risks of retaliation. The study also highlights the non-linear nature of trade policy shocks—larger changes trigger disproportionately greater disruptions. Communication quality matters too: ambiguous channels like tweets yield mixed economic signals, whereas formal and credible announcements drive clearer outcomes.

This reinforces our narrative suggesting that policymakers weigh short-term disruptions and retaliatory risks alongside long-term strategic goals when reshaping trade policy.

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