Credibility is trade policy

Abstract Export participation is a forward‐looking decision that involves large up‐front investments with back‐loaded returns. This implies that trade responds to expected future policy as well as current policy. The same observed policy change can trigger a wide range of responses depending on how transitory or persistent that change is expected to be, and trade responds to changes in expectations even when there are no observed changes in policy at all. This article combines empirical evidence with structural modelling to show that these lessons have important implications for how researchers interpret trade data and how policy makers should use trade policy to accomplish their objectives.