How do firms adjust when trade stops? Labor markets, industrial linkages, and macroeconomic effects

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Alminas Zaldokas

In this project, we investigate how firms adjust to sudden and unanticipated negative trade shocks. We explore a unique event when due to political reasons, unrelated to trade, the exporters of an emerging country have lost a major export market. Our rich firm-level data allows us to quantify the adjustment margins. In particular, we investigate how a significant loss in profits has led firms to adjust their employment structure and wages; capital investment; as well as product mark-ups; and the composition of export destination countries. Our project is likely to have major policy implications, suggesting that trade policies have an immediate effect on emerging country’s economy and labor market, and that recent global trends reversing trade integration might have adverse consequences in the export-dependent industries.

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