to affect export supply activity in the origin countries of its imports.<sup>44</sup> Hummels et al. (2014) employ WES as an instrumental variable, but in our case we simply include it as a control in our D-i-D regressions. Its role is to soak up variation in FYR Macedonia’s imports across products and origin countries that arise through developments abroad.

Another potential threat to identification are import demand shocks in FYR Macedonia that are correlated with the FVA reform episode. A key source of import demand shocks would be shocks to national income, but is not clear if these would differentially affect FVA products.<sup>45</sup> Expenditure data is not available at anywhere near the level of disaggregation of the Makstat data set, so we are not able to address shocks to expenditures. One quite plausible source of import demand shocks that we can make some attempt to control for are domestic supply shocks. A positive supply shock in a narrowly defined product would likely reduce import demand for that product, and vice versa. Any available data on production would also be at much more aggregated level than the Makstat data set, so we attempt to use international trade statistics from WITS to construct control variables, as we did for the export supply shocks. FYR Macedonia’s export statistics might well be informative of domestic supply considerations, but these data are possibly affected by the FVA reform and thus not useful to address this threat to identification.<sup>46</sup> Hence, we address the possibility of domestic supply shocks driving import demand shocks taking a plausible, if unorthodox, strategy. We note that most of the products made in FYR Macedonia that can plausibly replace imports over a short time horizon would be commodities and food and agricultural products. The most plausible source of shocks for these products would be weather-related shocks. Since FYR Macedonia is a very small landlocked country, it shares its major weather patterns with its neighboring countries. We therefore use fluctuations in imports of each of the countries that share a land border with FYR Macedonia as control variables to soak up variation in FYR Macedonian imports that would occur through this channel.<sup>47</sup> As with the ������ variable, we exclude each neighbor country’s imports from

> 44 There is a slight possibility that developments in FYR Macedonia could affect the WES variables of its neighbors. In robustness checks we show that our results are maintained when we exclude from the estimating sample the countries that share a land border with Macedonia.

> 45 In other settings, one might worry that international supply chains are organized so that very specific inputs would be imported into FYR Macedonia for further processing, and that shocks to the processing firm in FYR Macedonia would produce shocks to import demand for very specific inputs.  Supply chain trade of this kind is not a significant part of FYR Macedonian imports, so we are not overly concerned this possibility.  As we describe next, the inclusion of import demand shocks of FYR Macedonia’s immediate neighbors should do a reasonable job of controlling any remaining variation so long FYR Macedonia’s role in particular supply chains is not too different from one or more of its neighboring countries.

> 46 If the FVA reform makes it easier to import milk, then Macedonian cheese exports might surge, for example.

> 47 The countries are Albania, Bulgaria, Greece, and Serbia. Kosovo is another neighbor country but cannot be covered as it does not report data to WITS.  Note that the variables we include might also be successful in soaking up other sources of transitory import demand shocks that we have not listed.  For example, if there were a sudden increase in the demand for a fashion product from an idiosyncratic location, it is plausible that this demand shock would be felt in some of the neighboring countries at the same time. One-quarter of the population in FYR Macedonia is ethnically Albanian, for example, which may mean that fashion trends in Albania are correlated with fashion trends in FYR Macedonia.

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