Firm input choice under trade policy uncertainty

We examine the role of trade policy uncertainty (TPU) in shaping the import decisions of firms. In a model where firms must incur sunk costs to adopt new imported varieties of an input, reduction in TPU for a given input increases imports of that input (a substitution effect) possibly other inputs (a scale effect). We explore this in the context of China's accession to WTO, which bound China's tariffs. We find that, controlling for current tariffs, the threat reversion to past high tariffs reduces imports, but much less so after WTO accession, consistent with lower TPU. The current -tariff trade elasticity also increases after WTO entry, reflecting a greater perceived permanence of current tariffs. We find evidence of both substitution scale effects for imports, and post accession, firms were more likely to adopt products previously subject to higher tariff risk.