Climate policy uncertainty and energy impacts on trade openness and foreign direct investment in the United States: Evidence from the RALS co-integration test

Abstract

Climate change is becoming an increasingly pressing global issue, and understanding how climate policy uncertainty affects trade openness and foreign direct investment is crucial. This study provides contemporary insights into this complex relationship, particularly in the context of the United States, which is a major player in global trade and investment. The study employed a monthly dataset spanning from January 1990M01 to December 2020M12. Co-integration exists between all the variables specified by employing Residual Augmented Least Squares (RALS-EG), climate policy uncertainty, and fossil fuel consumption adverse influence upon trade openness and foreign direct investment, economic growth, and renewable energy consumption positive impact upon trade openness and foreign direct investment via the use of fully modified ordinary least square (FMOLS), and Dynamic Ordinary Least Squares (DOLS). The Fourier Toda-Yamamoto causality reveals that climate policy uncertainty, economic growth, renewable energy, and trade openness exhibit bidirectional causality, while fossil fuels exhibit unidirectional causality. Based on the findings, policymakers should prioritize reducing climate policy uncertainty to create a more stable environment for trade and foreign direct investment (FDI). Clear and consistent climate policies can mitigate the negative impact of uncertainty on trade openness and FDI.