On the relation between purchasing manager’s index and trade policy uncertainty: evidence from China, Japan and the USA

Abstract

Purpose Trade uncertainty does influence the firm’s new investment, profitability and supply chain finance. Consequently, it results in decreased consumption and low consumer confidence and eventually disrupts global economic activity. This paper aims to propose a model to uncover the effects of trade policy uncertainty (TPU) on the real economic activity and economy’s health measured in terms of the purchasing manager’s index (PMI). Design/methodology/approach This study uses the PMI, trade policy uncertainty index, economic policy uncertainty index and short-term interest rate. The relation between economic activity and uncertainty was studied using nested regression and vector autoregressive model. Findings The empirical results show that PMI of China and Japan were more responsive to the TPU of the USA and remained more fluctuating during the year 2018–2019. Importantly, this paper notices that the US’s PMI reached a low historically subject to its own trade policy and tension with China. Overall, TPU has shown more pronounced effects on PMI across China, Japan and the USA, followed by important economic and political events and major trade tariff uncertainty deals. Practical implications The empirical outcome holds some practical implications trade uncertainty affects not only the economic health of the economy but also market participants, global investors and international political environment, recent trade barriers, tariff wars and ambiguity raise question about free and fair global trade and competitiveness of the member country of the world trade organization. Originality/value The work is a novel that attempts to explain economic activity and supply chain through PMI. Unlike conventional economic indicators, e.g. gross domestic product, producer price index, consumer price index, employment, etc. PMI measures manufacturing industries’ overall status concerning the number of orders, inventory levels, productions, supplier deliveries and employment.