Trade Adjustment in Large Crises

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Intellectual Merit: Trade as a share of global income has increased dramatically in recent decades, and countries increasingly rely on international trade to grow their incomes. Many studies have examined the import of trade for growth and productivity over long periods of time - often decades or longer. Frequently, however, the impact of changes in trade flows is much more acute. For example, there were sudden and dramatic reversals in trade flows during the Asian crisis in the late 1990s, the Argentine crisis of 2002, and even during the recent global recession of 2008-2009. Little is known about the mechanics of trade adjustment at the firm and product level, and direct links between macroeconomic performance and the reductions in trade during these episodes remain largely unexplored. The PI's propose to use novel transaction-level micro-data that allows - along several dimensions - the most detailed study of the adjustment of the external sector during a crisis episode. The PI's have obtained customs data for all trade transactions for Argentina during 1996-2008 and propose to expand their study to include other countries. An empirical characterization of trade adjustment will allow them to evaluate how costly short-run trade adjustments are in terms of consumer welfare and output productivity. In existing literature the theoretical channels are clear but the empirical evidence is limited. One of their preliminary findings is that the extensive margin, defined as the entry and exit of importing firms or imported product categories, plays a small role in adjustment during the crisis. However, at the firm level, the extensive margin plays an important role as firms drop products that constituted a significant share of their previous imports. Preliminary calculations suggest that the inability of firms to purchase inputs as they did before the crisis has a meaningful impact on their productivity for at least 2-3 years. This has not been uncovered by previous studies because none have examined such disaggregated levels of data through such an acute crisis. Broader Impact: The PI's propose to improve our understanding of mechanically how countries' imports and exports adjust and the impact of such adjustment on the economy. In particular, which margins of trade adjust the most? Do the quantitatively important adjustments occur within firms and within detailed product categories, or do firm entry and exit and product entry and exit play an important role? Does the quality of products traded change? Is adjustment different between intermediate and final goods? How does the response of multinationals differ from that of local firms? Are these responses different for trade flows with developed or developing countries? A clearer description and deeper un¬derstanding of the impact of shocks to international trade on a country's productivity and welfare, particularly during crises, is important because it will inform a country's optimal choice of trade policies and exchange rate regimes. Further, it may give a better sense for understanding the cross-country and cross-sector propagation of international shocks. Given the recent reminder of the potential for large cross-country volatility, this understanding is important for sound policy decisions, to evaluate the impact of potential macroeconomic shocks, and to understand the drivers of welfare declines in recessions in open economies.