Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271897 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10253
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We develop a dynamic model of inventory investment and trade to examine how firms adjust to changes in international trade costs when facing a risk of stockouts due to demand uncertainty and order lead times for imports. We study two strategies firms may use to avoid stockouts, namely holding inventories of imports, and engaging in dual sourcing. Both strategies are shown to magnify the protective effects of trade costs. Using transaction-level data for a U.S. steel wholesaler experiencing an episode of Section-201 tariffs, we find strong evidence consistent with this magnification effect. Higher tariffs are shown to significantly reduce both the inventory-sales and the import-sales ratios, as the firm adjusts its stockout avoidance strategies.
Subjects: 
international trade
import tariff
inventory
dual sourcing
stockout avoidance
JEL: 
F12
L81
Document Type: 
Working Paper
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