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Discussion Paper Details

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Title: Volatility in the Small and in the Large: The Lack of Diversification in International Trade

Author(s): Francis Kramarz, Julien Martin and Isabelle Mejean

Publication Date: September 2016

Keyword(s): Aggregate fluctuations, Firm-level volatility and firm-to-firm trade

Programme Area(s): International Trade and Regional Economics

Abstract: Does international trade foster or dampen the risk exposure of firms and countries? Trade induces specialization, thus increasing economies? exposure to idiosyncratic supply shocks. But greater geographic diversification through trade offers natural hedging properties against demand shocks. Key to this debate is the interplay between the sources of shocks hitting firms and countries and their economic diversification. We offer an integrated empirical study of these different dimensions. We quantify the contribution of shocks and the realized structure of trade networks to the volatility of exports, at the firm-level and in the aggregate. Exporters? volatility is shown to directly depend on the (lack of) diversification in their portfolio of clients. Indeed, most exporters, including the largest, have one or two main clients that dwarf the others. This structure of trade networks magnifies aggregate fluctuations.

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Bibliographic Reference

Kramarz, F, Martin, J and Mejean, I. 2016. 'Volatility in the Small and in the Large: The Lack of Diversification in International Trade'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11534