Can Global Uncertainty Promote International Trade?

• Authors: Isaac Baley.
• BSE Working Paper: 110390 | July 16
• Keywords: risk sharing , international trade , globalization , information asymmetry
• JEL codes: D5, D8, D9, F4, F6
• risk sharing
• international trade
• globalization
• information asymmetry

Common wisdom dictates that uncertainty impedes trade—we show that uncertainty can fuel more trade in a simple general equilibrium trade model with information frictions. In equilibrium, increases in uncertainty increase both the mean and the variance in returns to exporting implying that trade can increase or decrease with uncertainty depending on preferences. Under general conditions on preferences, we characterize the importance of these forces using a sufficient statistics approach. Higher uncertainty leads to increases in trade because agents receive improved terms of trade, particularly in states of nature where consumption is most valuable. Trade creates value, in part, by offering a mechanism to share risk and risk sharing is most effective when both parties are uninformed.