Dynamic Adjustment to Trade Shocks

Global trade flows and supply chains adjust gradually. Empirical estimates of the trade elasticity for the short run are a fraction of those for the long run and suggest that trade is subject to substantive dynamic frictions. We develop a tractable framework that provides microfoundations for trade adjustment and rationalizes estimation of a time-varying trade elasticity. The model features forward-looking firms facing sticky sourcing choices and nests a version of the Eaton-Kortum model as a limiting long- run case. We calibrate the model and quantify the impacts of two events: the 2004 EU Eastern enlargement (an anticipated change) and the 2018 US-China trade war (an arguably unanticipated change). Our findings suggest that sourcing frictions and anticipation effects alter the time pattern of specialization, can result in short-term welfare losses but long-term gains, and can drive marked trade adjustments before anticipated shocks occur.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.