Essays on the dynamic effects of international tradepolicy

This dissertation is comprised of three essays regarding the dynamic effects of changes in trade policy at the firm-level and in the aggregate. The study aims to understand the effects of policy changes when they happen with certainty and when they are uncertain. In the first chapter, we study how anticipation to policy changes overstates the estimated elasticity of substitution, the most important parameter in international trade. Standard identification of this parameter 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. A trade model with inventories replicates these dynamics and illustrates that consumed imports provide unbiased estimates of the elasticity of substitution. We propose an empirical measure of consumed imports validated through Monte Carlo simulations. Application to the data shows that using imports instead of consumed imports overestimates the annual elasticity by 68%, the average elasticity by 16%, and increases the ratio of the long- to short-run response from 2 to 3.5. In the second chapter, we study the effects on trade from the annual tariff uncertainty about China’s MFN status renewal 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. Second, the probability of a tariff increase was perceived to be relatively small, with an average annual probability of non-renewal of about 6 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 (s, s) 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 account for around 30% of the trade dampening effects of uncertainty found in annual data. 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. The third chapter highlights the overestimation of the productivity-enhancing effect of tariff reductions that arise due to a measurement issue. Tariff liberalizations and the associated input tariffs reductions have been documented to result in increased firm level productivity. This is because input tariff reductions shift the composition of firms’ inputs towards imported goods. However, foreign inputs entail…