۱- Introduction

۲- Empirical strategy

۳- Data and stylized facts

۴- Results

۵- Conclusion

References

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.

Introduction

This paper presents an integrated analysis of the sources of volatility of firms and countries in international trade markets. Both individual and aggregate exports are shown to be strongly exposed to shocks hitting firms’ foreign clients. Hence, micro-economic foreign shocks appear to be a key driver of the volatility of exports at the firm-level as well as in the aggregate. The results contribute to the broad literature on the impact of international trade on the risk exposure of firms and countries. First, greater participation into international markets, by increasing the role of large firms as well as sectoral concentration, has been shown to magnify a country’s vulnerability to idiosyncratic supply shocks (di Giovanni and Levchenko, 2009, 2012). However, cross-country diversification dampens macro-economic volatility by reducing exposure to domestic demand shocks (Caselli et al., 2015). Focusing on micro-demand shocks, Kelly et al. (2013) document that firms with a more diversified customer base display a lower volatility. Hence, to fully understand the trade-volatility nexus, the structure of exporters’ sales, within as well as across destinations, must be analyzed together with the various shocks that hit firms and countries in international markets. This paper provides a step in this direction by modeling the universe of trade relationships between French exporters and their European partners, observed over a period of 15 years. The richness of the data together with a new empirical strategy allow us to provide a comprehensive decomposition of the different sources of trade volatility at various levels of aggregation.