Economic Interdependence in the Global Economy from Gravity

• In Event: Climate and Geopolitics in Global Value Chains

Abstract

Scholarship has interpreted the skyrocketing levels of international trade as an indication of the increasing interdependence of national economies. But the same period -- because, in part, of the openness of global markets -- has seen an equally unprecedented explosion in global economic growth and a diversification of trade partners. Even as states have plugged into an integrated global economy, they are also better positioned to endure interruptions in trade than ever before. Is the modern international economy becoming more or less interdependent as a whole? What determines whether a given trade relationship between states is becoming more or less interdependent? This paper clarifies the concept of interdependence and develops a measure derived from the international economics of the gravity equation. The measure accounts for each state's composition of trade, domestic productivity, position in global value chains and potential alternative trading partners. The results show that interdependence is distributed highly unevenly. In over 50% of directed dyads, the amount of welfare lost is less than 0.1%. However, above the 90th percentile of directed dyads, the degree of economic welfare at stake dramatically increases. The trajectory of dependence is also highly uneven. China's entry into the WTO decreased overall dependence, increased dependence on China, and decreased dependence on the United States.

Author

• Michael-David Mangini, Yale University