How Trade Responds to Anticipated Tariff Changes: Evidence from NAFTA, with Khan

[Working Paper] [Slides] (Journal of International Economics, 2021)

Firms anticipate upcoming tariff changes by shifting their purchases to periods with lower costs. This paper shows that such anticipatory dynamics overstate the trade elasticity. Standard identification of the trade response to trade cost changes uses tariff variation from Free Trade Agreements (FTA) and assumes that trade flows equal their consumption. However, FTAs eliminate tariffs gradually through announced phaseouts. This allows firms to delay their purchases until tariff cuts are effective while consuming their inventories. Indeed, during NAFTA's staged tariff reductions, imports experienced sizable anticipatory slumps followed by liberalization bumps. To study the behavior of consumed imports we construct a measure that uses inventory-sales ratios to smooth out trade flows. Its application to the data yields that the annual trade-flow elasticity is 56% larger than the trade-consumption response and that the ratio of the long- to short-run elasticity increases from 2.3 with trade flows to 3.4 with consumed imports. The measure is validated through Monte Carlo simulations of a (s,S) ordering model that reproduces the observed trade pattern.

Working Papers

Inventories, Input Costs and Productivity Gains from Trade Liberalizations, with Khan

[Draft] [Slides] [VITM YouTube]

Sourcing internationally allows firms to access cheaper or better inputs at the expense of more costly logistical operations. In particular, inventory holdings rise when firms switch towards foreign sources. This paper revisits the productivity enhancing effect of trade liberalizations taking into account the costs of the inventory premium of importing --- typically omitted in standard measures of productivity. Through model simulations we show that in the presence of the inventory costs, their omission leads to a systematic overestimation of the elasticity of productivity to input tariffs. Controlling for the firm's import intensity and inventory usage in the estimation of productivity corrects for the bias. We study the relevance of this potential bias during India's trade liberalization in the early 1990s. First, we document that inventory holdings of intermediate goods increased significantly with import intensity and input tariffs. Second, we extend a standard productivity estimation procedure with a control function of the various firm-level input costs. The mismeasurement channel accounts for around 35 percent of the estimated productivity gains. Consistent with the gradual adjustment to the tariff reductions, the bias in the response of firm-level productivity is backloaded.

[New] Trade Policy Dynamics: Evidence from 60 years of U.S.-China Trade , with Alessandria, Khan, Ruhl and Steinberg

[Draft] [Slides]

We study the growth of Chinese imports into the United States from autarky during 1950--1970 to about 15 percent of overall imports in 2008, taking advantage of the rich heterogeneity in trade policy and trade growth across products during this period. Central to our analysis is an accounting for the dynamics of trade, trade policy, and trade-policy expectations. We isolate the lagged effects of past reforms and the current effects of uncertainty about future reforms. We build a multi-industry, heterogeneous-firm model with a dynamic export participation decision to estimate a path of trade-policy expectations. We find that being granted Normal Trade Relations (NTR) status in 1980 was largely a surprise and that, in the early stages, this reform had a high probability of being reversed. The likelihood of reversal dropped considerably during the mid 1980s, and, despite China's accession to the World Trade Organization (WTO) in 2001, changed little throughout the late 1990s and early 2000s. Thus, although uncertainty depressed trade substantially following the 1980 liberalization, much of the trade growth that followed China's WTO accession was a delayed response to previous reforms rather than a response to declining uncertainty.

[Updated]Taking Stock of Trade Policy Uncertainty: Evidence from China's Pre-WTO Accession, with Alessandria and Khan

[Draft] [Slides] [VoxChina]

We study the effects on international trade from the annual tariff uncertainty about China’s MFN status renewal in the US prior to joining the WTO. We have four main findings. First, in monthly data trade increases significantly in anticipation of uncertain future increases in tariffs and falls upon renewal. Second, the probability of a tariff increase was perceived to be relatively small, with an average annual probability of non-renewal of about 4.5 percent. Third, what matters more is the expected future tariff rather than the uncertainty around it. We identify these effects using within-year variation in the risk of trade policy changes around the renewal vote and trade flows. We show that an (sS) inventory model generates this behavior and that variation in the strength of the stockpiling in advance of the vote is increasing in the storability of goods. Fourth, the costs associated with within year trade policy induced stockpiling reduce entrants' incentive to operate in a market with tariff uncertainty. Our results explain why trade may hold up in advance of a prospective policy change such as Brexit or the US-China escalating tariff war of 2018-19, but may fall off sharply even if expected tariff increases do not materialize.

Work in Progress

Dynamic Trade Elasticities, with Alessandria, Khan, Ruhl and Steinberg

The Aggregate Effects of Global and Local Supply Chain Bottlenecks: Delays, Trade, and Inventories , with Alessandria, Mix, Khan and Ruhl

Productivity Gains from Trade Liberalizations through More Efficient Inventory Management, with Alessandria and Khan

Pricing to Clients and the Pass-Through of Shocks, with Merga

Stockpiling and the Expected Pandemic: China's Trade of PPE, with Alessandria and Khan