Does U.S. Trade Policy Uncertainty Change How Tariffs Affect Inflation and Currency in Asia?

This study examines whether U.S. trade policy uncertainty (TPU) influences the impact of tariffs on inflation and exchange rates in Asian economies. Using a dynamic panel GMM framework, the baseline results show that tariffs do not have a robust direct effect on inflation or exchange rates once macroeconomic dynamics are accounted for. When U.S. TPU and its interaction with tariffs are included, the results indicate that tariffs and TPU raise inflation in the full sample, while the negative and significant interaction term suggests that higher uncertainty dampens tariff pass-through. This moderating effect appears sensitive to China’s inclusion, as the interaction loses statistical significance when China is excluded. Overall, the findings highlight that U.S. trade policy uncertainty conditions the inflationary effects of tariffs, while exchange rates remain largely unresponsive to tariff and uncertainty shocks.