How does trade respond to anticipated tariff changes? Evidence from NAFTA

Shafaat Khan and Armen Khederlarian

Journal of International Economics, 2021, vol. 133, issue C

Abstract: 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.

Keywords: Anticipation; Trade elasticity; Inventories; NAFTA; Phaseouts (search for similar items in EconPapers)
JEL-codes: F12 F13 F14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022199621001185
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:133:y:2021:i:c:s0022199621001185

DOI: 10.1016/j.jinteco.2021.103538

Access Statistics for this article

Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and Rodríguez-Clare, Andrés

More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().