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Discussion Paper Details

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Title: High Order Openness

Author(s): Jean Imbs and Laurent Pauwels

Publication Date: April 2020

Keyword(s): Global supply chains, growth, Openness Instrument, Openness Measure, productivity and Synchronization

Programme Area(s): International Macroeconomics and Finance, International Trade and Regional Economics and Macroeconomics and Growth

Abstract: We propose a new measure of high order trade, labeled HOT, based on the fraction of a sector's downstream uses that cross a border. Because it decomposes gross output, HOT evaluates a sector's exposure to foreign shocks abstracting altogether from observed direct trade, which we exploit to construct instruments for openness. For the same reason, we can evaluate HOT with precision for activities where measured direct trade is essentially zero, like some services. We compute HOT and its instruments for 50 sectors in 43 countries using recently released data on international input-output linkages. We compare its properties with conventional measures that all rely on observed direct trade. HOT correlates positively with conventional trade measures across countries, much less across sectors as many more are open according to our measure. HOT correlates significantly with sector productivity, growth, and synchronization; none of the conventional measures do. Once instrumented, we show high order openness causes productivity and synchronization, but not growth.

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Bibliographic Reference

Imbs, J and Pauwels, L. 2020. 'High Order Openness'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14653