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

Francis Kramarz (), Julien Martin and Isabelle Mejean ()
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Isabelle Mejean: ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research

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Abstract: How does international trade affect the risk exposure of firms and countries? Trade induces specialization, thus increasing economies' exposure to idiosyncratic supply shocks. But greater geographic diversification in trade destinations offers natural hedging properties against demand shocks. In this paper, we offer an integrated economic and econometric view of the impact of trade on firms and countries volatility. 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 implies that individual exporters are strongly exposed to microeconomic demand shocks. The concentration of trade flows further implies that such risk does not wash out across firms, thus contributing to aggregate fluctuations.

Date: 2020-01
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Published in Journal of International Economics, 2020, 122, pp.103276. ⟨10.1016/j.jinteco.2019.103276⟩

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Related works:
Journal Article: Volatility in the small and in the large: The lack of diversification in international trade (2020)
Working Paper: Volatility in the Small and in the Large: the Lack of Diversification in International Trade (2020)
Working Paper: Volatility in the Small and in the Large: The Lack of Diversification in International Trade (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-04207800

DOI: 10.1016/j.jinteco.2019.103276

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