We study the consequences of market uncertainty on international trade.
An increase in foreign market uncertainty dampens China's aggregate
exports on both the extensive and intensive margins. The adverse effects
are more pronounced in industries facing tighter financial constraints
than in others. We propose a dynamic trade model to explain the facts.
Greater uncertainty depresses a firm's expected value of exporting
and borrowing capacity, leading to fewer exporters and a smaller average
size of exports. Under calibrated parameters, the uncertainty shock
accounts for a sizable fraction of China's trade collapse in the 2008
financial crisis and the recent trade war.