Foreshadowing US-China Economic Decoupling: A Bayesian VAR Analysis of US Trade Policy Uncertainty and Chinese Macroeconomic Spillovers

Abstract

This thesis examines whether economic decoupling between the United States and China has occurred in recent years following heightened uncertainty, particularly regarding trade policy between the two nations. Rather than treating decoupling as a strictly political, geopolitical, or institutional phenomenon, this thesis adopts a strictly empirical and economic perspective, and focuses on only observable trade and investment related linkages and their dynamic responses in response to an increase in trade policy uncertainty. Using quarterly macroeconomic, trade, and investment data, this thesis employs a Bayesian Vector Autoregression (BVAR) framework to estimate the spillover effects of American trade policy uncertainty (TPU) on Chinese economic and macroeconomic activity and the exposure of bilateral trade flows. Impulse response functions are used to assess whether shocks in TPU can directly affect various variables in the endogenous block, thereby this thesis contributes to the literature on spillovers and provides new evidence on the consequences of trade uncertainty between the world’s two largest economies.