| Summary: | How does trade policy affect exporters' ability to respond to foreign demand shocks Faced with a sudden change in the demand for their goods, exporting firms must optimally change their inputs and/or input sources. This paper tests whether a country's own trade policy makes such adjustments harder for firms that rely on imported inputs. The analysis exploits new time-varying data on tariffs and non-tariff measures faced by Indonesian firms and focuses on the impact of exchange rate shocks on exports to Japan. In response to a depreciation of the yuan, which makes Chinese exports more competitive, the findings show that firms that face non-tariff measures on their inputs see a much larger drop in their export values compared to firms that do not face any non-tariff measures. That is not the case for import tariffs on inputs, which do not affect the export response to the shock. This difference is consistent with the (partial) fixed costs imposed by non-tariff measures on imports in contrast to the pure variable costs of tariffs. The magnitude of this effect depends on the type of non-tariff measure and on firms' characteristics, such as their participation in global value chains, size, and product quality
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