Aggregate Shocks, Domestic Trade Collapse and Regional Realignment

Abstract

How does trade within a country respond to aggregate shocks? Using novel administrative plant and product level data, we show that COVID-19 induced shutdown in March 2020 led to a collapse in domestic trade across regions in India. Well after the movement restrictions were lifted, trade continues to suffer while GDP recovers. We show that regional realignment, a shift from inter- to intra-region sales and input-sourcing, led by plants more dependent on inter-region sales (inputs) before the shock, drives the trade collapse. On the product side, those with a higher pre-pandemic scope to expand into the home market witness greater realignment, accounting for 7.6 percent of the sales growth in the last quarter of 2020. Our results control for other competing channels like changes in demand and are robust to a variety of specifications.

Keywords: Trade Collapse, Supply chain, Aggregate Shock, Realignment

JEL Classification: F14, E32, L23, L6