Product Cost-Share: a Catalyst of the Trade Collapse

I study the responsiveness of Slovenian trade during the collapse of 2008-2009 and shed light on channels that enhanced the sensitivity of international trade to the demand shock.The responsiveness of intermediate goods. Trade is found to be associated with the cost-share of inputs; i.e., imports of inputs accounting for a larger cost-share faced a more than proportionate drop in the downturn coupled with a more than proportionate rebound in the recovery. I hypothesise that this is the outcome of larger post-shock inventory adjustments, which higher cost-share intermediates are subject to. This rationale is supported theoretically by a simple (S,s) model of inventory management and, empirically, by reduced form estimations of the main model predictions. Moreover, products’ cost-share is found to be associated with an enhanced reaction of the frequency of shipments at the product level, a proxy for inventory adjustments. Conditioning the results on the type of firm ownership, i.e. intra-firm or arm’s length trade,does not reveal a differential response between the two organisational modes, except for imports of higher cost-share products for which intra-firm trade acted as further catalyst of the collapse.