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...
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World Bank, Washington, DC
2021
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| 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 |
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okr-10986-355342022-09-20T00:09:42Z How Does Trade Respond to Anticipated Tariff Changes? Evidence from NAFTA Khan, Shafaat Yar Khederlarian, Armen ANTICIPATION TRADE ELASTICITY INVENTORIES NAFTA TARIFF PHASEOUT TRADE RESPONSE FREE TRADE AGREEMENT PREFERENTIAL TRADE AGREEMENTS NORTH AMERICAN FREE TRADE AGREEMENT 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. 2021-05-03T16:13:50Z 2021-05-03T16:13:50Z 2021-04 Working Paper http://documents.worldbank.org/curated/en/377051619701752842/How-Does-Trade-Respond-to-Anticipated-Tariff-Changes-Evidence-from-NAFTA http://hdl.handle.net/10986/35534 English Policy Research Working Paper;No. 9646 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper Canada Mexico United States |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
ANTICIPATION TRADE ELASTICITY INVENTORIES NAFTA TARIFF PHASEOUT TRADE RESPONSE FREE TRADE AGREEMENT PREFERENTIAL TRADE AGREEMENTS NORTH AMERICAN FREE TRADE AGREEMENT |
| spellingShingle |
ANTICIPATION TRADE ELASTICITY INVENTORIES NAFTA TARIFF PHASEOUT TRADE RESPONSE FREE TRADE AGREEMENT PREFERENTIAL TRADE AGREEMENTS NORTH AMERICAN FREE TRADE AGREEMENT Khan, Shafaat Yar Khederlarian, Armen How Does Trade Respond to Anticipated Tariff Changes? Evidence from NAFTA |
| geographic_facet |
Canada Mexico United States |
| relation |
Policy Research Working Paper;No. 9646 |
| description |
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. |
| format |
Working Paper |
| author |
Khan, Shafaat Yar Khederlarian, Armen |
| author_facet |
Khan, Shafaat Yar Khederlarian, Armen |
| author_sort |
Khan, Shafaat Yar |
| title |
How Does Trade Respond to Anticipated Tariff Changes? Evidence from NAFTA |
| title_short |
How Does Trade Respond to Anticipated Tariff Changes? Evidence from NAFTA |
| title_full |
How Does Trade Respond to Anticipated Tariff Changes? Evidence from NAFTA |
| title_fullStr |
How Does Trade Respond to Anticipated Tariff Changes? Evidence from NAFTA |
| title_full_unstemmed |
How Does Trade Respond to Anticipated Tariff Changes? Evidence from NAFTA |
| title_sort |
how does trade respond to anticipated tariff changes? evidence from nafta |
| publisher |
World Bank, Washington, DC |
| publishDate |
2021 |
| url |
http://documents.worldbank.org/curated/en/377051619701752842/How-Does-Trade-Respond-to-Anticipated-Tariff-Changes-Evidence-from-NAFTA http://hdl.handle.net/10986/35534 |
| _version_ |
1764483233795276800 |