Modeling the Timing of Trade Adjustment: A Piecewise Linear Trend Approach with Financial and Labor Frictions

This paper studies the dynamic adjustment of bilateral trade following Economic Integration Agreements (EIAs) and examines how financial development and labor market rigidity moderate the timing of trade responses. We approximate the event time adjustment path using a Piecewise Linear Trend (PLT) specification that relaxes global linearity restrictions common in dynamic gravity models. Event study evidence reveals heterogeneous pre-entry and post-entry slopes, particularly at the product-margin level. Split joint pre-trend tests show that aggregate trade satisfies long-run parallel trends, while product-level margins exhibit significant secular restructuring prior to implementation, motivating explicit slope parameterization. Within the PLT framework, financial development is associated with short-run anticipation effects, whereas labor rigidity corresponds to delayed post-entry adjustments. Industry-level interactions indicate that these dynamics vary systematically with sectoral characteristics. The results remain robust to zero-inclusive estimators, alternative institutional proxies, and alternative event time discretizations. Overall, the findings demonstrate that institutional conditions shape the temporal profile of trade adjustment and that flexible slope modeling is essential for identifying dynamic responses to trade liberalization.