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Dynamic Adjustment to Trade Shocks

Author

Listed:
  • Junyuan Chen
  • Carlos Góes
  • Marc-Andreas Muendler
  • Fabian Trottner

Abstract

Global trade flows and supply chains adjust gradually. Empirical estimates of the trade elasticity for the short run are a fraction of those for the long run and suggest that trade is subject to substantive dynamic frictions. We develop a tractable framework that provides microfoundations for trade adjustment and rationalizes estimation of a time-varying trade elasticity. The model features forward-looking firms facing sticky sourcing choices and nests a version of the Eaton-Kortum model as a limiting long-run case. We calibrate the model and quantify the impacts of two events: the 2004 EU Eastern enlargement (an anticipated change) and the 2018 US-China trade war (an arguably unanticipated change). Our findings suggest that sourcing frictions and anticipation effects alter the time pattern of specialization, can result in short-term welfare losses but long-term gains, and can drive marked trade adjustments before anticipated shocks occur.

Suggested Citation

  • Junyuan Chen & Carlos Góes & Marc-Andreas Muendler & Fabian Trottner, 2026. "Dynamic Adjustment to Trade Shocks," CESifo Working Paper Series 12570, CESifo.
    • Handle: RePEc:ces:ceswps:_12570
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    References listed on IDEAS

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    1. George Alessandria & Horag Choi, 2007. "Do Sunk Costs of Exporting Matter for Net Export Dynamics?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(1), pages 289-336.
    2. de Souza, Gustavo & Hu, Naiyuan & Li, Haishi & Mei, Yuan, 2024. "(Trade) War and peace: How to impose international trade sanctions," Journal of Monetary Economics, Elsevier, vol. 146(C).
    3. Haoyuan Ding & Kees G. Koedijk & Tong Qi & Yanqing Shen, 2022. "U.S.–China trade war and corporate reallocation: Evidence from Chinese listed companies," The World Economy, Wiley Blackwell, vol. 45(12), pages 3907-3932, December.
    4. Jessie Handbury, 2021. "Are Poor Cities Cheap for Everyone? Non‐Homotheticity and the Cost of Living Across U.S. Cities," Econometrica, Econometric Society, vol. 89(6), pages 2679-2715, November.
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    Keywords

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    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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