U.S. Trade Policy Uncertainty and the Current Account: Unpacking Trade and Financial Channels

This paper investigates the implications of trade policy uncertainty (TPU) in the United States for current account balance (CAB) dynamics, given renewed interest in pursuing trade policy measures to address persistent current account deficits. We examine whether TPU, a distinct source of policy uncertainty and separate from enacted tariff and non-tariff measures, can influence aggregate macroeconmic outcomes. Using a local projection framework that controls for domestic and global macroeconomic factors and enacted trade policy changes, we find that TPU shocks generate a statistically significant but transitory positive effect on the CAB, primarily through a sharper contraction in imports relative to exports, with durable goods relatively more affected. From a savings and investment perspective, TPU raises precautionary savings in the private sector and modestly depresses investment. This is primarily driven by government investment and partially offset by private investment, particularly in high-tech sectors. Bilateral trade effects are heterogenous across different groups of trading partners: geopolitical distance and closer GVC and FDI linkages imply larger declines. Our findings suggest that while TPU can momentarily shift external balances, it does not deliver sustained improvements, highlighting the importance of transparent and predictable trade policy frameworks that mitigate costly uncertainty and avoid unintended macroeconomic distortions. Our findings also imply that econometric analyses of the CAB effects of trade policy should control for uncertainty in order to avoid spurious correlations.