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Inventory, Sourcing, and the Effects of Trade Costs: Theory and Empirical Evidence

Author

Listed:
  • Chris Muris
  • Horst Raff
  • Nicolas Schmitt
  • Frank Stähler

Abstract

We develop a dynamic model of inventory investment and trade to examine how firms adjust to changes in international trade costs when facing a risk of stockouts due to demand uncertainty and order lead times for imports. We study two strategies firms may use to avoid stockouts, namely holding inventories of imports, and engaging in dual sourcing. Both strategies are shown to magnify the protective effects of trade costs. Using transaction-level data for a U.S. steel wholesaler experiencing an episode of Section-201 tariffs, we find strong evidence consistent with this magnification effect. Higher tariffs are shown to significantly reduce both the inventory-sales and the import-sales ratios, as the firm adjusts its stockout avoidance strategies.

Suggested Citation

  • Chris Muris & Horst Raff & Nicolas Schmitt & Frank Stähler, 2023. "Inventory, Sourcing, and the Effects of Trade Costs: Theory and Empirical Evidence," CESifo Working Paper Series 10253, CESifo.
    • Handle: RePEc:ces:ceswps:_10253
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    References listed on IDEAS

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    More about this item

    Keywords

    international trade; import tariff; inventory; dual sourcing; stockout avoidance;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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