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Firm Input Choice Under Trade Policy Uncertainty

Author

Listed:
  • Kyle Handley
  • Nuno Limão
  • 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.

Suggested Citation

  • Kyle Handley & Nuno Limão & Rodney D. Ludema & Zhi Yu, 2020. "Firm Input Choice Under Trade Policy Uncertainty," NBER Working Papers 27910, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:27910
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    Cited by:

    1. Li, Jie, 2021. "Economic policy uncertainty, contracting frictions and imports sourcing decisions," Economics Letters, Elsevier, vol. 200(C).
    2. He, Chuan & Mau, Karsten & Xu, Mingzhi, 2021. "Trade Shocks and Firms Hiring Decisions:," Research Memorandum 001, Maastricht University, Graduate School of Business and Economics (GSBE).

    More about this item

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F1 - International Economics - - Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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