The Transmission of Trade Shocks Across Countries: Firm-Level Evidence From the Covid-19 Crisis

This paper examined the adjustments to trade shocks by analysing the impact of Covid-19 restrictions on imports and exports. The study utilises firm- and partner country-level foreign trade data from Lithuania, Latvia and Estonia at a monthly frequency from January 2019 to December 2020. The analysis focuses on short-term adjustments during the first wave of the pandemic. Our findings reveal that (1) adjustments to Covid-19 restrictions predominantly occurred through the intensive margin, which accounted for 70%-90% of the overall adjustment. In contrast, the extensive margin-representing trade with specific partner countries or products-contributed a smaller proportion. Similarly, adjustments in trade quantities played a more significant role than price changes. (2) Analysis by product category indicates that differentiated products, which are more difficult to substitute, were more susceptible to trade shocks. (3) Smaller and less productive firms were more likely to adjust through the extensive margin compared to larger and more productive firms.