Trade Policy is Real News: Theory and Evidence

Abstract

We evaluate the aggregate effects of changes in trade barriers when these changes can be implemented slowly over time and trade responds gradually to changes in trade barriers because firm-level trade costs make exporting a dynamic decision. Our model shows how expectations of changes in trade barriers affect the economy. We find that while decreases in trade barriers increase economic activity, expectations of lower future trade barriers temporarily decrease investment, hours worked, and output. Further-more, canceling an expected decline in future trade barriers raises investment and output in the short run but substantially lowers medium-run growth. These effects are larger when the expected reform is bigger. In the data, we find that countries with more trade growth after the General Agreement on Tariffs and Trade (GATT) rounds decreased investment and hours worked in the years leading to the tariff cuts, as predicted by our model.

The Economic Impacts of the US–China Trade War

“…This could happen due to the dynamic decisions of importers of durable goods: If current tariffs are an indication of even bigger future restrictions, buyers who can carry inventory will increase current demand in anticipation of even further tariff increases. Alessandria & Mix (2021) provide evidence of anticipatory effects in previous tariff events, but this hypothesis has not been linked to pass-through. Another possibility related to demand shifters is that the tariffs triggered simultaneous improvements in average product quality that offset (quality-unadjusted) price declines.…”

Taking stock of trade policy uncertainty: Evidence from China’s pre-WTO accession

“…To learn about the longer-run path of trade policy, it will be useful to consider more durable investments such as exporting or FDI as in Alessandria and Mix (2018). Ruhl and Willis (2017) find that the expected duration of exporting of a new exporter is only about three years compared to 9 years for a continuing exporter and so perhaps by leveraging these different horizons we can recover a longer path of future trade policy.…”

The Dynamic Effects of Multilateral Trade Policy With Export Churning

“…It can also be used to study events like the U.S.–China trade war as firms make decisions about exporting that depend on how permanent they believe the trade war will be. Anticipation of future trade agreements is analyzed in a two‐country model with forward‐looking exporters in Alessandria and Mix (2019).…”