What is the New World Trade Uncertainty (WTU) Index?
The Index measures the level of uncertainty in global trade which is surging in many countries of the World
The trade hostilities that have emerged since last year have dragged down the global growth and will probably play a big role if there is a resulting recession. If only there was a way to measure this uncertainty and how it has evolved over time. If you are interested in finding out how rising trade tensions are cause for concern for global growth, check out the IMF’s World Economic Outlook.
Talking about IMF, researchers at the global financial institution (Hites Ahir & Davide Furceri) along with Nicholas Bloom of Stanford University have constructed a World Trade Uncertainty index for 143 countries with the data going back all the way to 1996. It is a broad-based measure based on the Economist Intelligence Unit (EIU) country reports.
The EIU reports provide a sense of credibility from a single reputable source with the standardized process & structure they follow, thus providing accurate & consistent data. There are existing measures of trade but they are narrowly focused on either a few countries or regions like the index of BlackRock or the indexes by Sandile Hlatshwayo.
The construction of the index involved searching the EIU reports for the terms “uncertain,” “uncertainty,” and “uncertainties” for each country & quarter and appearing near the following words — protectionism, North American Free Trade Agreement, tariff, trade, United Nations Conference on Trade and Development, and World Trade Organization.
Making the WTU index comparable across different countries involved scaling the raw counts by the total number of words in each report. As per the details provided in the index description, The index is associated with greater economic policy uncertainty (EPU), stock market volatility, risk & lower GDP growth.
Here are some of the key findings from the WTU index in 3 charts:
The Index shows that after relative stability of 20 years, it spiked 10-fold from the previously recorded highs (Figure 1). The increased uncertainty started to jump around the third quarter of 2018 when a series of tariffs were imposed by the United States on China. The decline in the fourth quarter coincided with the announcement of a deal between the two countries.
The truce proved temporary as a new series of tariffs went into effect on March 01, 2019. With trade talks set to resume again in October, the WTU index is sitting at an all-time high. Based on IMF’s estimates the trade uncertainty recorded in Q1' 2019 could be enough to reduce global growth by up to 0.75% point in 2019.
While it is true that the two biggest economies, the U.S & China have been embroiled in a trade dispute, high levels of uncertainty have been recorded among their key trading partners & countries geographically closer to these two countries — Canada, Mexico, Japan, and large European economies (Figure 2). Countries like Japan & South Korea are also embroiled in a trade spat of their own.
And the last trend shows that the effect of trade uncertainty has not been uniform across the globe — varying across regions & income groups. It has been more of a problem for the advanced economies followed by emerging economies with Low-income economies being the least affected (Figure 3).
Geographically speaking trade tensions were the highest in the Western hemisphere (United States, Canada, Mexico etc.) was the most affected followed by the Asia Pacific (China, Japan etc.). Europe saw a smaller jump comparatively while Middle & Central Asia and Africa were the least affected.