Abstract:
This paper investigates the trade elasticity, a key parameter in international economics, and examines biases in its estimation arising from dynamic treatment effects and staggered adoption. Leveraging the 2018 US trade war tariffs as a natural experiment, I apply a local projections difference-in-differences approach, estimating a short-run elasticity of -1.4 and a long-run elasticity of -3.7, with adjustments stabilising within 15 months. Failing to account for staggered adoption or dynamics introduces a downward bias of approximately 50%. I also propose a novel correction to the estimation of dynamic multipliers to cumulative policy changes in the presence of staggered treatment timing. This correction eliminates a systematic bias that can otherwise distort estimates.