Firm Input Choice Under Trade Policy Uncertainty

Kyle Handley, Nuno Limão, Rodney Ludema and Zhi Yu

No 27910, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine the role of trade policy uncertainty in shaping the import decisions of firms. If the adoption of a new input requires a sunk cost investment, then the prospect of price increases in that input, e.g. due to trade barriers, reduces the adoption of that input (a substitution effect) and possibly other inputs (complementarity via lower profits). Thus trade policy uncertainty can affect a firm’s entire input mix. We provide a new model of input price uncertainty that captures both effects and derive its empirical implications. We test these using an important episode that lowered input price uncertainty: China’s accession to the WTO and the associated commitment to bind its import tariffs. We estimate large increases in imported inputs by firms from accession; the reduced uncertainty from commitment generates substitution effects larger than the reductions in applied tariffs in 2000-2006 and has significant profit effects.

JEL-codes: F02 F1 F12 F13 F14 F61 O19 O24 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-int
Note: ITI
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Citations: View citations in EconPapers (16)

Published as Kyle Handley & Nuno Limão & Rodney D. Ludema & Zhi Yu, 2024. "Firm input choice under trade policy uncertainty," Journal of International Economics, .

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Journal Article: Firm input choice under trade policy uncertainty (2024)
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