The IMF has built a global trade uncertainly index encompassing 143 countries and reaching back more than two decades that shows uncertainty at all time high.
The newly-minted index looks back to 1996 and shows trade uncertainty in the last year has jumped tenfold compared with previous highs.
The index shows increased uncertainty starting around the third quarter of 2018, coinciding with a heavily publicised series of tariff increases by the United States and China.
It then declined in the fourth quarter of 2018 as US and Chinese officials announced a deal to halt the escalation of tariffs at the G-20 meeting in December in Buenos Aires. It significantly spiked again in the first quarter of 2019 following a substantial expansion of American tariffs on imports from China on March 1st 2019.
The index compilers also say that increases in uncertainty shown by the index foreshadows significant output declines.
“Based on our estimates, the increase in trade uncertainty observed in the first quarter of 2019 could be enough to reduce global growth by up to 0.75 percentage point in 2019,” they say in an IMF blog published this week.
Trade uncertainty has been increasing not only in the United States and China but also in many countries around the world though generally focused on key US trading partners.
It says that high levels of trade uncertainty have been recorded in Canada, Mexico, Japan, and large European economies, and in many other countries geographically close to the United States and China.
“The level of trade uncertainty, however, varies significantly across regions and income groups. The recent rise in the uncertainty index has been felt the most in the Western Hemisphere, followed by Asia-Pacific and Europe,” it adds.
How the index was constructed
These Economist Intelligence Country reports follow a standardised process and structure which, the index compilers say, helps to mitigate concerns about accuracy, ideological bias, and consistency.
Moreover, this single, highly reputable source has a specific topical focus for coverage—economic and political developments. These factors make our index comparable across countries.
To construct the index, they tallied the number of times “uncertainty” is mentioned in the reports in proximity to a word related to trade.
Specifically, for each country and quarter, they searched EIU reports for the words “uncertain,” “uncertainty,” and “uncertainties” appearing near the following words: protectionism, North American Free Trade Agreement, tariff, trade, United Nations Conference on Trade and Development, and World Trade Organization.
To make the WTU index comparable across countries, the index compilers scaled the raw counts by the total number of words in each report.
An increase in the index indicates that trade uncertainty is rising, and vice versa.
The blogpost notes other existing measures of trade uncertainty focus either on the United States (the trade component of Economic Policy Uncertainty index by Scott Baker, Nicholas Bloom, and Steven Davis), or on the global economy as a whole (the index of BlackRock), or on a set of 44 countries (indexes by Sandile Hlatshwayo).