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How Does Trade Respond to Anticipated Tariff Changes Evidence from NAFTA (English)

Firms anticipate upcoming tariff changes by shifting their purchases to periods with lower costs. This paper shows that such anticipatory dynamics overstate the trade elasticity. Standard identification of the trade response to trade cost changes uses tariff variation from free trade agreements and assumes that trade flows equal their consumption. However, free trade agreements eliminate tariffs gradually through announced phaseouts. This allows firms to delay their purchases until tariff cuts are effective, while consuming their inventories. Indeed, during the North American Free Trade Agreement’s staged tariff reductions, imports experienced sizable anticipatory slumps followed by libseralization bumps. To study the behavior of consumed imports, a measure is constructed that uses inventory-to-sales ratios to smooth the trade flows. Its application to the data yields that the annual trade-flow elasticity is 56 percent larger than the trade-consumption response and that the ratio of the long- to short-run elasticity increases from 2.3 with trade flows to 3.4 with consumed imports. The measure is validated through Monte Carlo simulations of an (s,S) ordering model that reproduces the observed trade pattern.


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    Khan,Shafaat Yar, Khederlarian,Armen

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    Policy Research Working Paper

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    The World Region,

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    How Does Trade Respond to Anticipated Tariff Changes ? Evidence from NAFTA

  • Keywords

    consumption; long-run response; long-run elasticity; trade elasticity; price elasticity of gasoline; free trade agreement; trade policy changes; long run elasticity; value of imports; country of origin; time to market; trade adjustment; general equilibrium model; direction of trade; elasticity of substitution; measure of trade; transport of good; gasoline tax rate; demand for product; measure of import; market penetration; class of model; response of consumption; speed of adjustment; liquidity management; low transportation costs; choice of product; impact of trade; elasticity of trade; inventory holding; demand shock; high frequency; parameter value; International Trade; trade flow; trade datum; gravity equation; sample period; benchmark case; standard error; alternative measure; point estimate; indicator variable; product level; trade pattern; depreciation rate; source country; import good; dynamic response; average elasticity; estimation equation; standard model; dynamic model; business cycle; total trade; consumption response; price dynamic; credit crunch; methodological approach; import consumption; odds ratio; average trade; import process; trade costs; durable good; Durable goods; trade diversion; Trade Policies; sample selection; tariff change; shipping cost; consumption measure; panel data; sales tax; lower costs; annual imports; traded goods; time sery; inventory level; destination country; convenient feature; census data; account changes; positive value; upper bind; empirical study; export price; import share; section show; physical depreciation; continuous measure; price drop; predicted change; purchase price; delta method; consumption datum; proxy measure; Economic Policy; stock holding; benchmark value; average inventory; steady state; empirical result; inventory management; future research; temporary tax; state sale; Tax Holiday; national product; aggregate consumption; increasing return; take stock; product quality; econometric analysis; new product; retail sale; tax avoidance; product diversity; import demand; expected value; internal combustion; standard procedure; error-correction model; instrumental variable; import increase; industry productivity; domestic delivery; monopolistic competition; trade creation; output price; Trade Linkages; import volume; missing value; optimal policy; pricing schedule; marginal value; aggregate response; unanticipated shock; impulse response; aggregate variable; freight charge; log change; cross-sectional data; tariff cut; random disturbance; customs procedure; tariff reduction; oil tanker; solar panel; welfare implication; welfare analysis; Research Support; estimation method; local consumption; open access; development policy; empirical literature



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Khan,Shafaat Yar Khederlarian,Armen

How Does Trade Respond to Anticipated Tariff Changes Evidence from NAFTA (English). Policy Research working paper,no. WPS 9646 Washington, D.C. : World Bank Group.