Empiricai Evidence For The Effect Of Trade Openness On Growth Volatility

Trade openness and growth volatility are two important areas of macro-economy study. Since the reform and opening up, China’s economy has maintained a rapid growth and the export-oriented economy has achieved great success. With the development of globalization, the relationship of countries around the world is becoming increasingly close. At the same time, countries are more easily to be impacted by the rest of the world. As the trade liberalization deepens, international trade is playing an important role in the formation of the world economy synchronization cycle.While it is widely believed that trade openness is, under appropriate conditions, positively associated with growth outcomes, the link between openness and growth volatility is less well understood. In theory, the impact of trade openness on the growth volatility is bidirectional, so it is not ex ante clear whether greater openness should be associated with higher or lower growth volatility.Irrespective of whether the effect of trade openness on output volatility is positive or negative on average, this paper argues that openness lowers output volatility in sufficiently diversified economies, while it increases volatility in those with more concentrated export baskets. This paper uses the panel data of China during the period of1978-2012to study the mechanisms by which trade openness affects growth volatility, and focus on the important role of export diversification in conditioning the effect of trade openness on growth volatility. The results show that the link between openness and growth volatility is indeed conditioned by the extent to which a country has diversified its export base:when the export market is highly concentrated, the negative effect of trade openness on growth volatility will be alleviated; when the degree of export concentration is high enough, greater openness will associated with higher volatility.