Trade Adjustment and Productivity in Large Crises

Abstract

We empirically characterize the mechanics of trade adjustment during the Argen- tine crisis using detailed transaction-level customs data covering the universe of import transactions during 1996-2008. Though imports collapsed by nearly 70 percent from 2000-2002, the entry and exit of firms or products at the country level (the \extensive margin") played a small role in this adjustment. By contrast, the within-firm churning of inputs (the \sub-extensive margin") played a sizeable role, and we highlight significant heterogeneity in how firms adjusted their import mix. Motivated by these facts, we build a model of trade in intermediate inputs with heterogeneous firms, fixed import costs, and roundabout production to evaluate the channels through which a collapse in imports affects productivity. Import demand is non-homothetic and therefore the implications for productivity depend on the details of individual firm adjustments and cannot be summarized by the change in the aggregate import share. We simulate the model to discuss quantitatively these mechanisms in the context of an imported input cost shock that produces a significant productivity decline