How Does Trade Respond to Anticipated Tariff Changes? Evidence from NAFTA
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 u...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2021
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/377051619701752842/How-Does-Trade-Respond-to-Anticipated-Tariff-Changes-Evidence-from-NAFTA http://hdl.handle.net/10986/35534 |
| Summary: | 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 and assumes that trade flows equal
their consumption. However, free trade agreements eliminate
tariffs gradually through announced phaseouts. This allows
firms to delay their purchases until tariff cuts are
effective, while consuming their inventories. Indeed, during
the North American Free Trade Agreement’s staged tariff
reductions, imports experienced sizable anticipatory slumps
followed by libseralization bumps. To study the behavior of
consumed imports, a measure is constructed that uses
inventory-to-sales ratios to smooth the trade flows. Its
application to the data yields that the annual trade-flow
elasticity is 56 percent 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 an (s,S) ordering model that reproduces
the observed trade pattern. |
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