Working Paper: NBER ID: w27910
Authors: Kyle Handley; Nuno Limo; Rodney D. Ludema; Zhi Yu
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.
Keywords: Trade Policy Uncertainty; Input Decisions; WTO Accession; Firm Behavior; Sunk Costs
JEL Codes: F02; F1; F12; F13; F14; F61; O19; O24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade policy uncertainty (F13) | Adoption of new inputs (O33) |
| Decreased trade policy uncertainty (F19) | Increased likelihood of adopting imported inputs (F16) |
| Post-WTO accession (F13) | Average firm's imported inputs (D22) |
| Reduction in uncertainty (D80) | Elasticity of import responses to tariffs (F14) |
| Reduced uncertainty (D80) | Adoption of new HS6 products (L68) |
| Reduced uncertainty (D80) | Profit effects (D33) |
| Reduced uncertainty (D80) | Usage of other inputs (C67) |