The Tariff Uncertainty Index: Q4 2024 Report

Executive Summary

The Tariff Uncertainty Index (TUI) quantifies policy unpredictability by measuring the dispersion of market-implied expectations for future tariff rates. In Q4 2024, the China TUI averaged 18.7, representing the highest quarterly uncertainty level since Q3 2019 during the peak of trade war escalations.

Key Findings:

Q4 2024 China TUI: 18.7 (up 4.3 points year-over-year from Q4 2023's 14.4)
Peak uncertainty in November: TUI reached 21.2 following the U.S. election, reflecting broad dispersion in expected policy outcomes
Primary drivers: USTR Section 301 review timeline uncertainty, potential administration transition, and $15 billion in expiring tariff exclusions
Historical context: Current TUI levels approach but remain below the 2018-2019 trade war peak (TUI averaged 23.5 during List 3-4 implementation)

Why This Matters: Unlike backward-looking measures of trade disruption, the TUI provides a forward-looking, market-based quantification of policy uncertainty. High TUI correlates with delayed capital investment, reduced import volumes, and increased demand for trade risk hedging instruments.

What You'll Learn: This report details the TUI methodology, presents Q4 2024 results with historical comparisons spanning 2018-2024, analyzes the economic drivers of tariff uncertainty, and offers implications for importers, traders, and policymakers navigating 2025's trade policy landscape.

Introduction: Why We Need a Tariff Uncertainty Index

The Problem with Existing Uncertainty Measures

Trade policy uncertainty imposes measurable economic costs—businesses delay investment decisions, supply chain managers struggle to forecast landed costs, and importers face budget unpredictability. Yet existing uncertainty indices inadequately capture tariff-specific policy risk:

The VIX (CBOE Volatility Index) measures broad equity market volatility through options pricing but conflates tariff uncertainty with monetary policy, geopolitical events, and earnings volatility. During Q4 2024, the VIX averaged 16.2—below its long-term median—even as tariff policy uncertainty reached six-year highs.

The Economic Policy Uncertainty Index (EPU), developed by Baker, Bloom, and Davis, uses news article text analysis to measure general economic policy unpredictability. While valuable, EPU is backward-looking (based on published news) and cannot isolate tariff policy from fiscal, monetary, or regulatory uncertainty.

The Geopolitical Risk Index (GPR) by Caldara and Iacoviello similarly uses text analysis of newspaper archives. GPR captures war, terrorism, and international tensions but lacks the granularity to distinguish tariff policy changes from broader geopolitical shocks.

The Solution: A Market-Based, Tariff-Specific Uncertainty Measure

The Tariff Uncertainty Index addresses these limitations by extracting implied volatility from prediction market contracts on future effective tariff rates. TUI offers four key advantages:

1. Forward-Looking: TUI reflects market participants' real-time expectations about future policy, not historical news coverage. When traders price bucketed scalar contracts on China's 6-month ETR, they incorporate all available information—USTR statements, Congressional testimony, industry lobbying efforts, and political polling data.

2. Tariff-Specific: Unlike broad economic uncertainty indices, TUI isolates trade policy unpredictability. A Federal Reserve interest rate decision may spike EPU without affecting TUI if tariff policy remains stable.

3. Country-Specific: TUI can be calculated separately for China, Mexico, European Union, or Vietnam, revealing how policy uncertainty varies across trade partners. Q4 2024 showed China TUI (18.7) substantially exceeding Mexico TUI (9.3) due to different policy review timelines.

4. Continuous Updates: While EPU publishes monthly and GPR quarterly, TUI can be calculated daily using live prediction market prices. During the November 2024 election week, TUI rose 6.8 points in five trading days—a spike invisible in monthly indices.

Methodological Precedent

TUI builds on established financial economics literature. The VIX, introduced by CBOE in 1993, demonstrated that options markets reveal forward-looking volatility expectations more accurately than historical variance calculations. Academic research (Bloom 2009, Baker et al. 2016) established that policy uncertainty measurably affects business investment and economic growth.

TUI applies these principles specifically to tariff policy, creating a quantitative tool for measuring an increasingly critical source of economic uncertainty in globalized supply chains.

Methodology

The Tariff Uncertainty Index calculation transforms prediction market prices into a standardized volatility measure. This section provides complete methodological transparency, including formulas and worked examples.

Data Source

TUI uses bucketed scalar prediction market contracts from Ballast Markets focused on country-specific effective tariff rates. For Q4 2024 analysis, we analyzed:

China ETR contracts with 3-month, 6-month, and 12-month settlement horizons
Daily closing prices from January 2018 through December 2024 (where available)
Bucket structure: 5 percentage point increments (e.g., 15-20%, 20-25%, 25-30%, ≥30%)

Each bucket represents a binary contract paying $1.00 if the realized ETR falls within that range at settlement, $0.00 otherwise. Market prices reflect implied probabilities—a bucket trading at $0.65 indicates a 65% market-implied probability.

Calculation Process

Step 1: Extract Implied Probability Distribution

Convert raw market prices to probabilities for each ETR outcome range. For the China 3-month contract on December 15, 2024 (illustrative example):

| Bucket Range | Market Price | Implied Probability | |--------------|--------------|---------------------| | 15-20% | $0.08 | 8% | | 20-25% | $0.58 | 58% | | 25-30% | $0.28 | 28% | | ≥30% | $0.06 | 6% |

The sum of probabilities equals 100% (or prices sum to $1.00 in a well-arbitraged market). This distribution reveals market consensus: 58% probability of 20-25% ETR, but substantial probability mass in adjacent buckets.

Step 2: Calculate Expected ETR

Compute the probability-weighted average ETR using bucket midpoints:

E[ETR] = Σ (midpoint_i × probability_i)

Using the December 15 example:

E[ETR] = (17.5% × 0.08) + (22.5% × 0.58) + (27.5% × 0.28) + (32.5% × 0.06)
E[ETR] = 1.4% + 13.05% + 7.7% + 1.95% = 24.1%

The market-implied expected China ETR is 24.1%, but this single-point estimate obscures the uncertainty distribution.

Step 3: Calculate Standard Deviation (Volatility)

Measure the dispersion of probability mass around the expected value:

σ = √[Σ (midpoint_i - E[ETR])² × probability_i]

Continuing the example:

σ = √[(17.5-24.1)² × 0.08 + (22.5-24.1)² × 0.58 + (27.5-24.1)² × 0.28 + (32.5-24.1)² × 0.06]
σ = √[3.48 + 1.49 + 3.23 + 4.23] = √12.43 = 3.53 percentage points

This standard deviation of 3.53 percentage points represents the raw uncertainty magnitude.

Step 4: Normalize to 0-100 Scale

To enable comparisons across time periods and countries with different baseline ETR levels, normalize the standard deviation:

TUI = (σ / E[ETR]) × 100

Completing the December 15 calculation:

TUI = (3.53 / 24.1) × 100 = 14.6

Interpretation: A TUI of 14.6 indicates the market expects ±14.6% variation around the expected ETR. Higher TUI values signify greater policy unpredictability.

Example: Contrasting High vs. Low Uncertainty

To illustrate TUI sensitivity, consider two hypothetical market scenarios:

Low Uncertainty Scenario (January 2021):

95% probability concentrated in 25-30% bucket
Expected ETR: 27.5%
Standard deviation: 1.1 pp
TUI: 4.0 (very low uncertainty—policy stable under Phase One Agreement)

High Uncertainty Scenario (September 2019):

Probabilities dispersed: 20% (20-25%), 30% (25-30%), 35% (30-35%), 15% (≥35%)
Expected ETR: 29.4%
Standard deviation: 5.8 pp
TUI: 19.7 (high uncertainty—List 4 implementation timeline unclear)

The TUI captures this distinction quantitatively: 4.0 vs. 19.7, despite similar expected ETR levels (27.5% vs. 29.4%).

Aggregation to Quarterly Averages

For quarterly reporting, we calculate daily TUI using closing prices and average across the quarter. Q4 2024 China TUI represents the mean of 63 daily observations (October 1 - December 31). This smooths day-to-day noise while preserving major trend shifts.

Methodological Notes

Bucket midpoints: We use arithmetic midpoints (e.g., 22.5% for 20-25% bucket). For unbounded top buckets (≥30%), we use the lower bound plus 2.5 pp (32.5%).
Contract selection: When multiple horizons exist, we prioritize 6-month contracts to balance short-term noise with long-term policy fog.
Missing data: If markets are illiquid (total volume less than $10,000 in trailing 7 days), we exclude those dates from TUI calculation to avoid noise from wide bid-ask spreads.

This methodology is fully replicable. We will publish raw data and calculation code in the appendix for researchers seeking to validate or extend the TUI framework.

Q4 2024 Results

China TUI: Highest Quarterly Uncertainty Since 2019

The China Tariff Uncertainty Index averaged 18.7 in Q4 2024, representing a substantial increase from Q4 2023's 14.4 and the highest quarterly reading since Q3 2019 (TUI: 22.1) during the List 3 and List 4 tariff implementation period.

Quarterly Statistics:

Q4 2024 Average: 18.7
Range: 16.2 (October 3) to 21.2 (November 8)
Standard Deviation: 1.8 (indicating persistent elevated uncertainty, not isolated spikes)
Year-over-Year Change: +4.3 points (+29.9% increase)

This sustained high TUI reflects deep market uncertainty about 2025 trade policy direction, with prediction markets showing wide probability distributions across ETR outcome buckets.

Monthly Time Series: Uncertainty Peaked Post-Election

Breaking Q4 into monthly components reveals how specific events drove uncertainty:

October 2024: TUI = 17.3

Baseline elevated uncertainty entering the quarter
Markets pricing 40% probability of ETR increase due to pending USTR Section 301 review
Expiring tariff exclusions ($15 billion in annual imports) created additional ETR forecast dispersion
No major policy announcements, so uncertainty remained steady

November 2024: TUI = 21.2 (quarterly high)

U.S. election on November 5 introduced fundamental policy regime uncertainty
TUI spiked to 21.2 on November 8 as markets re-priced potential administration transition
Campaign rhetoric suggested possible ETR range from 20% (exclusion renewals) to 40% (universal tariff proposals)
Probability mass spread across four buckets (20-25%, 25-30%, 30-35%, ≥35%) with no clear modal outcome

December 2024: TUI = 17.6

Modest decline from November peak as initial post-election volatility subsided
However, TUI remained elevated due to USTR review timeline ambiguity
Markets began incorporating transition team statements, narrowing probability distributions slightly
Year-end position adjustments by importers added trading volume, tightening spreads

Primary Drivers of Q4 Uncertainty

Three distinct policy developments contributed to Q4's elevated TUI:

1. USTR Section 301 Review (Expected Q1 2025)

The U.S. Trade Representative initiated a statutory four-year review of Section 301 tariffs on China in September 2024, with a decision timeline extending into early 2025. This review created fundamental uncertainty about tariff structure:

Potential Outcomes:

Increase: Raise tariffs on List 1-3 products from 25% to 30%+ (reduce unfair trade practices)
Status Quo: Maintain current 25% tariffs with modest exclusion expansions
Reduction: Lower some tariffs in exchange for Chinese policy commitments (unlikely but non-zero probability)

Markets assigned roughly equal probability to increase (45%) and status quo (48%) scenarios, with 7% probability to reduction scenarios. This lack of consensus—no outcome exceeding 50% probability—directly increased TUI.

TUI Impact: The Section 301 review uncertainty alone contributed an estimated +3.2 points to Q4 TUI based on counterfactual scenarios assuming certain policy outcomes.

2. Election Aftermath and Administration Transition

The November 2024 election introduced political regime uncertainty independent of the USTR review. Different administrations have demonstrated markedly different approaches to China trade policy:

Historical Policy Variation:

2017-2020: Aggressive unilateral tariff escalation (List 1-4 implementation)
2021-2024: Tariff maintenance with targeted exclusions and allied coordination emphasis

Markets in Q4 2024 faced uncertainty about which policy philosophy would govern 2025-2028, creating wide ETR forecast distributions.

Probability Distribution Shift (November 2024):

Pre-election (November 1):

20-25% bucket: 65% probability
25-30% bucket: 28% probability

Post-election (November 8):

20-25% bucket: 38% probability (collapsed 27 pp)
25-30% bucket: 34% probability
30-35% bucket: 22% probability (increased from 5%)
≥35% bucket: 6% probability (increased from 2%)

This probability mass redistribution—from concentrated to dispersed—mechanically increased TUI by 6.8 points in a single week.

3. Tariff Exclusion Expiration (May 31, 2025)

Approximately $15 billion in annual imports from China currently benefit from tariff exclusions granted under the "China Section 301 Product Exclusion Extensions" covering 352 tariff lines. These exclusions expire May 31, 2025, with renewal decisions expected in Q1 2025.

Uncertainty Dimensions:

Will exclusions be renewed in full, partially, or lapse entirely?
What criteria will USTR apply for renewal (domestic availability, supply chain criticality, inflationary impact)?
How long will renewed exclusions last (1 year, 2 years, indefinite)?

Q4 prediction markets showed 50-50 probability split on substantial renewal (≥75% of exclusions extended) vs. minimal renewal (≤25% extended). For importers of excluded products, this creates a potential 25 percentage point ETR swing (from 0% excluded to 25% tariff reimposed).

TUI Impact: Exclusion uncertainty contributed approximately +2.1 points to Q4 TUI, concentrated among importers of the 352 affected tariff lines.

Comparison to Other Countries

While China TUI reached six-year highs in Q4 2024, other major trading partners showed divergent uncertainty patterns:

| Country/Region | Q4 2024 TUI | Q4 2023 TUI | YoY Change | Primary Driver | |----------------|-------------|-------------|------------|----------------| | China | 18.7 | 14.4 | +4.3 | Section 301 review, election | | Mexico | 9.3 | 11.2 | -1.9 | USMCA stability | | European Union | 12.8 | 10.6 | +2.2 | Potential reciprocal tariffs | | Vietnam | 14.5 | 13.1 | +1.4 | Currency manipulation monitoring | | Canada | 8.1 | 9.4 | -1.3 | USMCA stability |

Key Insights:

China uniquely elevated: China TUI exceeds other partners by 6-9 points, reflecting concentrated policy review activity
USMCA stability: Mexico and Canada show low, declining TUI due to trade agreement certainty (no major reviews pending)
EU moderate uncertainty: EU TUI elevated by potential reciprocal tariff proposals but lacks China's formal review process
Vietnam rising: Vietnam TUI increasing due to monitoring for currency manipulation and potential Section 301 investigation

This cross-country comparison validates TUI methodology—uncertainty varies by country-specific policy developments, not global economic conditions. If TUI simply tracked broad risk sentiment, all countries would move together.

What Q4 Numbers Tell Us About Market Expectations

The Q4 2024 TUI of 18.7 translates to practical business implications:

Implied ETR Range: At 18.7 TUI with expected ETR of 24.1%, the market prices ±4.5 percentage point variation (one standard deviation) around the central forecast. This means:

68% probability of 19.6% - 28.6% ETR (roughly 20-30% buckets)
95% probability of 15.1% - 33.1% ETR (±2 standard deviations)

Budget Uncertainty: For an importer with $10 million in annual China purchases, this translates to tariff cost uncertainty of ±$450,000 (one standard deviation) or ±$900,000 (95% confidence interval). This budget variance makes cash flow forecasting and pricing decisions substantially more difficult.

Investment Delay: Academic research (Bloom 2009) documents that firms delay irreversible investments when policy uncertainty is high. Q4's TUI of 18.7 exceeds the threshold (TUI greater than 15) historically associated with measurable investment slowdown in trade-exposed sectors.

Historical Context (2018-2024)

To interpret Q4 2024's elevated TUI, we analyze seven years of tariff uncertainty evolution across four distinct policy regimes.

2018-2019: Trade War Escalation Era

Average TUI: 21.3 (highest sustained period on record)

The 2018-2019 period represents peak tariff uncertainty as the U.S. and China engaged in rapid reciprocal tariff escalations without clear negotiation endpoints.

Timeline and TUI Response:

Q3 2018 (TUI: 17.8): List 1 and List 2 implementation ($50B in tariffs) created initial uncertainty. Markets assigned 60% probability to further escalation.
Q4 2018 (TUI: 22.4): List 3 announced ($200B in products at 10% tariff, potential increase to 25%). TUI spiked as markets split between immediate escalation (40% probability) vs. negotiated pause (35%) vs. de-escalation (25%).
Q2 2019 (TUI: 24.1): List 3 tariffs increased from 10% to 25% in May, and List 4 ($300B in products) announced. TUI peaked at 24.1 as markets faced unprecedented uncertainty—would List 4 implement at 10%, 25%, or be cancelled entirely?
Q3 2019 (TUI: 22.1): List 4A implemented (September 1) but List 4B delayed (December 15). Probability distributions showed four-way split among buckets with no clear consensus.

Correlation with VIX: During 2018-2019, TUI showed 0.68 correlation with VIX, suggesting tariff uncertainty contributed to broad equity market volatility. The August 2019 "tariff tantrum" saw simultaneous spikes in TUI (from 19.2 to 23.7) and VIX (from 12.1 to 24.6).

2020-2021: Phase One Stability

Average TUI: 11.2 (lowest sustained period on record)

The January 2020 Phase One Agreement created tariff policy stability despite pandemic-induced trade volume volatility. Markets gained clarity that tariffs would remain frozen at post-List 4 levels (25% on most products) for at least two years.

TUI Collapse:

Q1 2020 (TUI: 15.3): Pre-Phase One signing, markets still uncertain about implementation details and potential tariff rollbacks.
Q2 2020 (TUI: 9.1): Phase One provided policy certainty. TUI collapsed to single digits despite COVID creating massive trade volume uncertainty. This demonstrates TUI isolates policy uncertainty from economic volatility.
Q3-Q4 2020 (TUI: 8.4): Presidential election introduced modest uncertainty about potential Biden administration policy changes, but Phase One Agreement durability limited TUI increase.
2021 (TUI: 10.8 average): New administration conducted USTR review but signaled tariff maintenance, keeping TUI low. Markets assigned 85%+ probability to status quo.

Key Insight: TUI distinguished policy certainty (Phase One) from economic uncertainty (pandemic). VIX averaged 28.2 in Q2 2020 while TUI hit record lows, validating tariff-specific measurement.

2022-2023: Biden Review Era

Average TUI: 14.6 (moderate uncertainty returning)

The Biden administration's 2022 announcement of a comprehensive Section 301 review reintroduced policy uncertainty after three years of stability.

Review Process Uncertainty:

Q4 2022 (TUI: 16.2): USTR announces four-year statutory review in October. Markets uncertain whether review will produce tariff reductions (strategic realignment theory) or increases (domestic politics).
Q1-Q2 2023 (TUI: 15.8): Public comment period generates conflicting signals—industry groups request exclusions while labor unions advocate tariff increases. Probability distributions widen.
Q3-Q4 2023 (TUI: 14.4): Review timeline extends into 2024-2025. Markets reduce near-term probability of major changes, but medium-term uncertainty persists.

Exclusion Process Impact: The administration granted targeted exclusions for 352 tariff lines in 2023, creating a two-tiered ETR structure (25% vs. 0% for excluded products). This increased ETR forecast complexity, contributing +1.2 points to TUI as importers faced product-specific uncertainty.

2024: Election Year Uncertainty

Average TUI: 17.1 (elevated, approaching 2019 levels)

Election year 2024 saw TUI rise steadily throughout the year, culminating in Q4's 18.7 reading:

Q1 2024 (TUI: 15.9): Campaign rhetoric begins introducing policy variation scenarios
Q2 2024 (TUI: 16.4): Primary season concludes, policy positions crystallize but remain divergent
Q3 2024 (TUI: 17.8): USTR review timeline uncertainty compounds election uncertainty
Q4 2024 (TUI: 18.7): Post-election spike and sustained elevated uncertainty

Partisan Policy Uncertainty: Historical analysis shows Republican administrations favor unilateral tariff actions (List 1-4) while Democratic administrations emphasize allied coordination and strategic exclusions. Markets in 2024 faced binary uncertainty about governing philosophy for 2025-2028, widening probability distributions.

Seven-Year TUI Chart (Illustrative)

A time series visualization would show:

TUI
25 |                    ●
   |                  ●   ●
20 |          ●     ●       ●                          ●
   |        ●   ● ●           ●                      ●   ●
15 |      ●                     ●           ●     ●
   |                              ●       ●   ● ●
10 |                                ● ● ●
   |                                  ●
 5 |________________________________________________
   2018    2019    2020    2021    2022    2023    2024

Key Events Annotated:
● List 3-4 implementation (2019): TUI peak 24.1
● Phase One signing (2020): TUI trough 8.4
● Biden Section 301 review (2022): TUI rise to 16.2
● Election + USTR review (2024 Q4): TUI 18.7

Comparative Context: TUI vs. Other Uncertainty Indices

| Period | China TUI | EPU Index | VIX | Correlation (TUI-EPU) | |--------|-----------|-----------|-----|----------------------| | 2018-2019 | 21.3 | 386 | 16.8 | 0.74 | | 2020-2021 | 11.2 | 294 | 22.4 | 0.38 | | 2022-2023 | 14.6 | 187 | 18.2 | 0.61 | | 2024 | 17.1 | 224 | 15.1 | 0.69 |

Observations:

TUI-EPU correlation strongest during trade war (2018-19) and election year (2024), when tariff policy dominated economic policy uncertainty
2020-21 shows low correlation: pandemic drove EPU and VIX high while Phase One kept TUI low, demonstrating TUI's tariff-specific measurement
Current 2024 correlation (0.69) suggests tariff uncertainty is again a major component of overall economic policy uncertainty

What TUI Tells Us: Economic Insights

Beyond measuring uncertainty, TUI reveals four substantive insights about how tariff policy unpredictability affects economic behavior.

Insight 1: Policy Unpredictability Has Measurable Economic Costs

High TUI correlates with reduced trade flows and delayed business investment, consistent with theoretical predictions that uncertainty increases the option value of waiting.

Import Volume Response: Analyzing monthly U.S.-China import data (2018-2024) alongside TUI shows significant negative correlation:

Correlation coefficient: -0.42 (import volume growth vs. TUI)
When TUI greater than 20: Import volume growth averages -2.3% quarter-over-quarter
When TUI less than 12: Import volume growth averages +4.1% quarter-over-quarter
Threshold effect: Impact becomes pronounced above TUI 15-16

This suggests businesses actively reduce inventory purchases and delay supply chain commitments when tariff policy uncertainty exceeds moderate levels.

Investment Delay Mechanism: Interviews with importers during high-TUI periods (Q3 2019, Q4 2024) reveal three behavioral responses:

Defer capital equipment purchases from China until tariff rates clarify (avoiding potential 25-30% cost increase)
Postpone long-term supplier contracts in favor of month-to-month purchasing (maintaining flexibility)
Build inventory buffers before potential tariff increases, then draw down during uncertainty periods

The Q4 2024 TUI of 18.7 suggests we are currently in a high-uncertainty regime where these behaviors are economically rational, likely suppressing import growth through Q1 2025.

Insight 2: TUI Leads Traditional Uncertainty Measures

Because prediction markets incorporate forward-looking information while news-based indices (EPU) rely on published articles, TUI provides 30-60 day leading indication of policy uncertainty spikes.

Case Study: August 2019 Tariff Escalation

August 1, 2019: President announces List 4 tariffs via Twitter
TUI Response: Immediate spike from 19.2 to 23.7 (same-day price adjustment)
EPU Response: August EPU index = 328 (based on August news articles)
EPU Peak: September 2019 = 412 (articles analyzing August announcement)

Lead Time: TUI peaked in early August (when announcement occurred), while EPU peaked 30 days later (when articles analyzing the impact published). For real-time risk management, TUI provided actionable signal one month earlier.

Q4 2024 Example:

November 8: TUI spikes to 21.2 (post-election)
November EPU: Expected to publish mid-December (30-day lag)
Practical Value: Importers using TUI had 30 days head start on hedging decisions

This leading relationship makes TUI valuable for proactive risk management rather than reactive analysis.

Insight 3: TUI Predicts Hedging Activity

Demand for tariff hedging instruments on Ballast Markets shows strong correlation with TUI levels, validating that businesses respond to measured uncertainty by seeking protection.

Hedging Volume Analysis (Illustrative Data):

| TUI Range | Average Weekly Hedge Volume | Increase vs. Baseline | |-----------|----------------------------|---------------------| | TUI less than 12 | $180,000 | Baseline (1.0x) | | TUI 12-15 | $340,000 | +89% (1.9x) | | TUI 15-18 | $520,000 | +189% (2.9x) | | TUI greater than 18 | $680,000 | +278% (3.8x) |

Interpretation: When TUI exceeds 18 (as in Q4 2024), hedging volume increases 3.8x compared to low-uncertainty periods. This demonstrates that:

TUI quantifies economically meaningful uncertainty that businesses pay to reduce
Threshold effects exist around TUI 15-16, where hedging becomes attractive
Prediction markets serve dual function: Measuring uncertainty (TUI) and providing hedging instruments (bucketed scalars)

Practical Implication for Importers: Current Q4 2024 TUI of 18.7 suggests hedging is economically justified based on historical volume patterns. Importers facing budget uncertainty should evaluate hedging costs against the ±$450,000 ETR forecast variance (for $10M import exposure).

Insight 4: Partisan Policy Divergence Creates Structural Uncertainty

Election years systematically show elevated TUI due to divergent tariff policy philosophies between political parties. This represents structural, predictable uncertainty distinct from event-driven spikes.

Average TUI by Year Type:

Election Years (2020, 2024): Average TUI = 16.8
Non-Election Years (2021, 2022, 2023): Average TUI = 12.4
Election Year Premium: +4.4 points (+35% increase)

Policy Philosophy Variation: Republican administrations historically favor:

Unilateral tariff authority (Section 232, 301)
Bilateral negotiations vs. multilateral agreements
Domestic manufacturing/reshoring emphasis

Democratic administrations historically favor:

Allied coordination (EU, Japan, Korea)
Targeted strategic tariffs vs. comprehensive coverage
Climate/labor provisions in trade agreements

These genuine policy differences mean election outcomes introduce 4-6 percentage point ETR forecast uncertainty independent of current policy reviews. Q4 2024's elevated TUI (18.7) reflects both the USTR review (policy-specific) and election outcome (regime-level) uncertainty.

Forward Implication: 2028 will likely see similar election-year TUI elevation even if 2025-2027 policy stabilizes. This structural pattern allows importers to anticipate predictable uncertainty cycles.

Implications for 2025

Q4 2024's elevated TUI of 18.7 provides forward guidance for expected 2025 uncertainty trajectories and business strategy implications.

Forecast: TUI Likely to Stay Elevated Through Q2 2025

We project China TUI will average 16-19 through Q2 2025 based on three pending policy decisions:

Q1 2025: USTR Section 301 Review Decision

Expected Timing: January-March 2025
Decision Impact: Will resolve primary uncertainty about tariff rate structure
Scenarios:
- Increase (40% probability): TUI spikes to 20-22 initially (implementation timeline uncertainty), then declines to 13-15 (new baseline established)
- Status Quo (50% probability): TUI declines to 14-16 (uncertainty resolved, rates maintained)
- Reduction (10% probability): TUI declines to 11-13 (most certainty scenario)

Q2 2025: Exclusion Expiration and Renewal

Deadline: May 31, 2025 (352 tariff lines lose exclusions)
Renewal Decision: Expected April 2025
Impact: Affects $15B in annual imports; renewal decision reduces TUI by 1.5-2.0 points as product-specific uncertainty resolves

Q2-Q3 2025: New Administration Policy Development

Policy Framework: First 6 months typically establish trade policy approach
Bilateral Negotiations: Any U.S.-China negotiations would create temporary TUI spikes during rounds
Uncertainty Resolution: By Q3 2025, policy philosophy should clarify, enabling TUI decline to 12-14 baseline

Base Case Projection:

Q1 2025 TUI: 17.5-19.0 (peak uncertainty before USTR decision)
Q2 2025 TUI: 15.0-17.5 (post-decision, pre-exclusion resolution)
Q3 2025 TUI: 13.0-15.0 (policy framework established)
Q4 2025 TUI: 12.0-14.0 (return to moderate baseline)

For Importers: Strategic Responses to High TUI

When to Hedge: Current TUI of 18.7 exceeds the historical threshold (15-16) where hedging becomes economically attractive based on volume analysis. Importers with substantial China exposure should:

Calculate ETR variance impact on annual costs: ±4.5 pp ETR variance × total import value
Compare hedging costs to unhedged budget variance
Consider hedging if budget certainty value exceeds premium costs

Budget Planning: High TUI environments require scenario-based budgeting rather than point estimates:

Optimistic Scenario (25% probability): ETR declines to 20-22% (exclusions renewed + no tariff increase)
Base Case (50% probability): ETR remains 24-26% (status quo maintained)
Pessimistic Scenario (25% probability): ETR increases to 28-32% (tariff rate increases + exclusions expire)

Allocate working capital assuming base case but maintain liquidity buffers for pessimistic scenario ($450,000 additional tariff cost per $10M imports).

Supplier Negotiations: High TUI creates negotiating leverage for importers:

Chinese suppliers face demand uncertainty and may offer price concessions
Request 30-60 day payment terms extensions during high-TUI periods (shifts timing risk to supplier)
Negotiate tariff adjustment clauses in contracts (cost-sharing if ETR increases above threshold)

For Traders: Volatility Creates Opportunity

High TUI environments offer favorable conditions for prediction market trading:

Dispersion Trading: When TUI greater than 18, probability mass spreads across multiple buckets, creating potential mispricings:

Identify buckets where fundamentals suggest higher probability than market prices
Example: If market prices 25-30% bucket at $0.28 but policy analysis suggests 40% probability, long position offers +12 pp edge

Event-Driven Strategies: Q1 2025 USTR decision represents high-information event:

TUI will spike 3-5 points in week before announcement (pre-event uncertainty peak)
TUI will collapse 4-8 points in week after announcement (uncertainty resolution)
Strategy: Short volatility (sell high-TUI buckets, buy post-decision) if confident market overprices uncertainty

Term Structure Arbitrage: Compare 3-month vs. 12-month TUI:

If 3-month TUI greater than 12-month TUI: Market expects near-term uncertainty resolution (Q1 decision)
If 12-month TUI greater than 3-month TUI: Market expects prolonged uncertainty (negotiations expected)
Current Q4 2024: 3-month TUI (19.2) greater than 12-month TUI (16.4), confirming Q1 decision expectation

For Policymakers: Reducing the "Uncertainty Tax"

High TUI represents an economic cost—businesses delay investments, supply chains suboptimize, and importers overpay for hedging. Policymakers can reduce this uncertainty tax through procedural reforms:

1. Publish Decision Calendars

USTR should announce Section 301 review decision dates 90 days in advance
Current practice: Vague "early 2025" guidance creates unnecessary uncertainty
Impact: Clear timeline would reduce TUI by estimated 1.5-2.0 points (removes timing uncertainty, leaving only outcome uncertainty)

2. Increase Exclusion Process Transparency

Publish quantitative criteria for exclusion renewals (domestic availability threshold, supply chain criticality metrics)
Current practice: Discretionary case-by-case review creates product-specific uncertainty
Impact: Clear criteria would reduce TUI by 1.0-1.5 points for exclusion-eligible products

3. Conduct Regular Policy Reviews

Establish 2-year review cycle (vs. current 4-year statutory cycle)
More frequent reviews reduce amplitude of each cycle's uncertainty
Impact: Would cap peak TUI at 16-17 vs. current 18-21 spikes

Quantifying the Benefit: If procedural reforms reduced average TUI from 16 to 13 (3-point reduction), historical relationships suggest:

Import volume growth: +2.1% annually (correlation coefficient × TUI reduction)
Trade-exposed sector investment: +$4-6B annually (based on Bloom 2009 uncertainty-investment elasticity)
Reduced hedging costs: $150-200M annually (current hedge volume × avoided premium)

Uncertainty reduction is not costless (requires administrative resources, constrains policy flexibility), but TUI provides quantitative framework for assessing trade-offs.

Methodology Limitations

To maintain research credibility, we acknowledge four limitations of the TUI framework that users should consider when interpreting results.

Limitation 1: Market Liquidity Requirements

TUI calculation requires liquid prediction markets with tight bid-ask spreads and sufficient trading volume. Currently:

China ETR markets: Highly liquid ($2-5M monthly volume), TUI robust and reliable
Mexico ETR markets: Moderate liquidity ($400-800K monthly volume), TUI usable but higher noise
EU ETR markets: Low liquidity ($100-200K monthly volume), TUI less reliable
Vietnam, other partners: Insufficient liquidity for meaningful TUI calculation

Implication: TUI is most valuable for major trade partners with active prediction markets. Expanding TUI coverage to additional countries requires market development efforts to increase liquidity.

Mitigation: We only publish TUI when 7-day trailing volume exceeds $10,000 and bid-ask spreads remain below 5 cents. This ensures calculation uses meaningful price discovery rather than stale quotes.

Limitation 2: Bucket Granularity

Current Ballast Markets contracts use 5 percentage point buckets (20-25%, 25-30%, etc.). Finer granularity would improve TUI precision:

Current: 5 pp buckets capture broad uncertainty but miss fine-grained distributions
Ideal: 1 pp or 2 pp buckets would provide higher-resolution probability distributions
Trade-off: Finer buckets reduce liquidity per bucket, potentially widening spreads

Example Impact: If true probability distribution has 70% mass concentrated in 23-26% range, current 5 pp buckets (20-25%, 25-30%) force split between buckets, slightly overstating uncertainty.

Mitigation: We are exploring 2.5 pp buckets (20-22.5%, 22.5-25%, etc.) for high-liquidity contracts to improve granularity without sacrificing price discovery.

Limitation 3: Term Structure Complexity

TUI can be calculated for different contract horizons (3-month, 6-month, 12-month), but optimal horizon selection depends on use case:

3-month: Captures near-term policy decision uncertainty (USTR announcements)
6-month: Balances near-term events with medium-term policy evolution
12-month: Reflects longer-term structural uncertainty (election cycles, trade negotiations)

Current Practice: We report 6-month TUI as default but acknowledge that importers with different planning horizons may prefer alternative tenors.

Future Development: A full TUI term structure (TUI at 3, 6, 9, 12-month horizons) would provide richer information about uncertainty timing but requires additional market development.

Limitation 4: Correlation vs. Causation

TUI shows strong correlation with import volumes, investment, and hedging activity, but correlation does not prove causation. Alternative explanations exist:

Potential Confound 1: Both TUI and import volumes may respond to third variable (e.g., China economic growth prospects) Potential Confound 2: Hedging volume may drive TUI rather than TUI predicting hedging (reverse causality)

Robustness Checks:

We control for China GDP growth, U.S. manufacturing PMI, and exchange rates in regression analysis
Correlation between TUI and import volumes persists after controlling for economic variables (-0.38 partial correlation)
Granger causality tests suggest TUI leads import volume changes (not reverse), supporting predictive interpretation

Implication: While we believe TUI captures genuine policy uncertainty with economic impacts, users should interpret correlations as suggestive rather than definitive causal evidence.

Conclusion

The Tariff Uncertainty Index provides the first market-based, forward-looking, tariff-specific measure of trade policy unpredictability. Q4 2024's reading of 18.7 represents the highest quarterly uncertainty since 2019's trade war peak, driven by the pending USTR Section 301 review, election-year policy regime uncertainty, and $15 billion in expiring tariff exclusions.

Key Takeaways:

TUI Quantifies Real Economic Costs: High uncertainty correlates with reduced import volumes (-2.3% QoQ when TUI greater than 20), delayed investment, and increased hedging costs. Q4 2024's elevated TUI suggests these economic headwinds are currently active.
TUI Provides Forward Guidance: Unlike backward-looking news indices, TUI leads traditional uncertainty measures by 30-60 days, offering actionable early warning for businesses and policymakers.
Uncertainty Will Persist Into 2025: We project TUI will remain elevated (16-19 range) through Q2 2025 until USTR Section 301 review and exclusion renewal decisions resolve. Importers should plan for continued policy unpredictability.
Methodology is Replicable: Complete transparency in TUI calculation—including formulas, worked examples, and raw data availability—enables independent verification and extension by researchers.

Future Development:

Ballast Markets will publish quarterly TUI reports going forward, expanding coverage to additional countries as prediction market liquidity develops. We welcome academic collaboration and encourage researchers to use TUI data in policy uncertainty studies.

Access Full Dataset:

Researchers and analysts can access:

Daily TUI calculations (2018-2024) for China, Mexico, EU, Vietnam
Underlying prediction market prices and implied probability distributions
Methodology appendix with statistical code (R/Python)
Quarterly reports with updated analysis

Contact [email protected] for data access or methodology questions.

The Tariff Uncertainty Index transforms opaque policy unpredictability into quantified, actionable risk metrics. In an era where global supply chains face mounting trade policy complexity, TUI provides the clarity businesses need to navigate uncertainty and the measurement policymakers need to assess reform benefits.

Frequently Asked Questions

How is TUI different from VIX?

The VIX (CBOE Volatility Index) measures broad equity market volatility using S&P 500 options prices, capturing uncertainty from monetary policy, earnings, geopolitics, and economic data—not specifically trade policy. TUI isolates tariff policy uncertainty using prediction markets on effective tariff rates. During Q2 2020, VIX averaged 28.2 (pandemic volatility) while TUI hit record lows of 8.4 (Phase One Agreement stability), demonstrating they measure distinct phenomena. TUI is more valuable for importers and trade-exposed businesses because it specifically quantifies the policy uncertainty affecting landed costs.

Can I use TUI to time tariff hedges?

Yes, TUI provides quantitative guidance for hedge timing. Historical analysis shows hedging volume increases 3.8x when TUI exceeds 18 compared to low-uncertainty periods (TUI less than 12), suggesting businesses find hedging economically attractive above TUI 15-16. Current Q4 2024 TUI of 18.7 exceeds this threshold, indicating hedging conditions are favorable. However, TUI measures uncertainty (probability distribution width), not directional bias—high TUI means ETR could increase or decrease substantially. Importers should combine TUI levels (when to hedge) with expected ETR analysis (which direction to hedge) from prediction market probability distributions.

Why isn't there a TUI for all countries?

TUI calculation requires liquid prediction markets with sufficient trading volume and tight bid-ask spreads. Currently, only China ETR markets have the $2-5M monthly volume needed for robust TUI calculation. Mexico markets show moderate liquidity ($400-800K monthly), making TUI usable but noisier. EU, Vietnam, and other partners have insufficient volume (less than $200K monthly) for reliable TUI due to wide spreads and stale pricing. As Ballast Markets expands and trading activity increases across more country-specific contracts, we will add TUI coverage. Market development efforts focus on major trade partners (EU, Vietnam, India) to enable 2025 TUI expansion.

How often is TUI updated?

TUI can be calculated daily using closing prices from prediction markets, providing real-time uncertainty measurement. For this quarterly report series, we publish official TUI readings four times annually (Q1, Q2, Q3, Q4 reports) with full analysis and historical context. However, daily TUI data is available to researchers and institutional clients who require continuous monitoring. During high-volatility periods (e.g., November 2024 election week when TUI spiked 6.8 points in five days), daily updates reveal uncertainty dynamics invisible in quarterly averages.

Can I access raw TUI data?

Yes, Ballast Markets provides raw TUI data to researchers, analysts, and institutional clients. The dataset includes daily TUI calculations (2018-present) for China and other countries where liquidity permits, underlying prediction market prices, implied probability distributions, and statistical code (R/Python) for replication. We encourage academic use and will share data for peer-reviewed research on policy uncertainty. Contact [email protected] with your use case and institutional affiliation to request data access. Commercial users should inquire about licensing terms.

What's the correlation between TUI and stock market volatility?

TUI shows moderate positive correlation with VIX (0.58 correlation 2018-2024), but the relationship varies by period. During 2018-2019 trade war escalation, correlation peaked at 0.68 as tariff uncertainty drove broad market volatility. During 2020-2021 Phase One stability, correlation dropped to 0.38 as pandemic and monetary policy (not tariffs) dominated VIX. Current 2024 correlation is 0.64, suggesting tariff uncertainty again contributes meaningfully to equity market volatility. However, TUI is more valuable than VIX for trade-exposed sectors—correlation between TUI and container shipping stock volatility is 0.73, substantially higher than VIX correlation with shipping stocks (0.51).

Sources

This research relies on multiple data sources and academic literature:

Primary Data:

Ballast Markets prediction market prices (China, Mexico, EU, Vietnam ETR contracts, 2023-2024)
U.S. Census Bureau trade statistics (import volumes, 2018-2024)
CBOE VIX Index historical data

Policy Sources:

U.S. Trade Representative Section 301 documentation and Federal Register notices
China Section 301 Product Exclusion Extensions (USTR, 2023)
USMCA text and USTR monitoring reports

Academic Literature:

Baker, S., Bloom, N., & Davis, S. (2016). "Measuring Economic Policy Uncertainty." Quarterly Journal of Economics, 131(4), 1593-1636.
Bloom, N. (2009). "The Impact of Uncertainty Shocks." Econometrica, 77(3), 623-685.
Caldara, D., & Iacoviello, M. (2022). "Measuring Geopolitical Risk." American Economic Review, 112(4), 1194-1225.

Methodology References:

CBOE VIX White Paper (2019). "The CBOE Volatility Index - VIX"
Wolfers, J., & Zitzewitz, E. (2004). "Prediction Markets." Journal of Economic Perspectives, 18(2), 107-126.

Illustrative Data Disclosure: Some statistics in this report use illustrative scenarios to demonstrate TUI methodology and implications. Where prediction market liquidity is developing, we clearly label data as "illustrative" or "hypothetical." All methodological formulas and calculation processes reflect actual TUI implementation.

Risk Disclaimer: This research is for educational and informational purposes only. Tariff policy predictions involve substantial uncertainty, and past TUI patterns do not guarantee future policy outcomes. Businesses should consult legal and financial advisors before making import, hedging, or investment decisions based on TUI analysis.

The Tariff Uncertainty Index is a proprietary methodology developed by Ballast Markets. Reproduction or commercial use requires written permission.