The transmission of foreign shocks to the Estonian production network

Supply chain resilience is a key topic for industrial policymakers, generating demand for rigorous evidence. This paper uses a unique set of firm-to-firm transaction data – Estonian value-added tax data – to provide new empirical estimates for a key concern for policy makers: the domestic propagation of a foreign shock to the supply chain. This paper uses the early Covid-19 lockdowns in China as a quasi-random supply shock to Estonian importers and then measures its propagation through the domestic production network. The difference-in-differences identification strategy captures a substantial negative shock to importers (-6% on imports, -6% on domestic sales, -2% on domestic purchases) which is further propagated downstream to their domestic buyers (-3% on purchases, -5% on sales) and to their domestic suppliers (-7% on sales, -4% on purchases). Firms that held higher inventories and sourced from a more diverse set of suppliers experienced smaller declines in output suggesting possible mitigation strategies.