How Does Trade Openness Affect Output Growth? A Perspective from the Input Diversity

Jiajie Yu and Shuang Meng ()
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Jiajie Yu: Business School, Beijing Normal University, Beijing 100875, China
Shuang Meng: School of International Trade and Economics, Central University of Finance and Economics, Beijing 100081, China

Sustainability, 2023, vol. 15, issue 11, 1-21

Abstract: Globalization has led to a rapid increase in the international trade of intermediate goods, which plays a vital role in economic growth. This study investigates whether trade openness facilitates output growth by improving access to intermediate inputs. In particular, it has been examined whether industrial sectors with higher intermediate input diversity grow relatively faster in countries that are more open to trade. Through the adoption of the difference-in-differences approach, we find strong evidence that this is indeed the case based on a large cross-country sample. The empirical estimation indicates that industries more diversified in intermediate inputs will grow by 2.6 percentage points faster in more outward-oriented countries. Furthermore, our results are robust to various specification checks and are unlikely to be driven by omitted variables, outliers, or reverse causality. By identifying the mechanism through which trade openness facilitates output growth, our study highlights the additional gains from trade liberalization that may be undermined by increased protectionism, especially for industrial sectors that rely on diversified intermediate inputs.

Keywords: trade openness; intermediate inputs; output growth; Herfindahl index (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2023
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