Effects of Free Trade Agreements and Market Openness on U.S. Export Diversification

Abstract

Classical international trade theories emphasize comparative advantages that arise from specialization without taking into account the fact that specialization exposes the exporting country to product risk and market risk. Therefore, in the second half of the 20th century, economists have studied diversification strategies to manage export risk. However, there has been almost no empirical study on the U.S export diversification. At the same time, preferential trade arrangements are flourishing with the Doha round in a stalemate. This paper thus tries to examine the relationships between FTAs as well as trade openness on export diversification of the United States. Employing Hummels and Klenows intensive and extensive margins, proxies for degrees of export specialization and diversification, my empirical study suggests that trade openness of export partners increase the U.S. extensive margins while entering into FTAs increases the U.S. intensive margins. Extensive margins are often associated with export risk management while intensive margins tend to be regarded as increasing the total export value. This suggests that the U.S., just like any other country in the world, also faces an inherent tradeoff between greater returns due to specialization and greater exposure to shocks from the world market. The United States nevertheless remains in a strong position that allows it not to worry about export risks because it is currently exporting the largest number of categories among the worlds top 7 exporters to almost all the export markets in the world. Hence, the United States would be far better off by keeping up with its pursuit of FTAs rather than trying to urge its partners to open up more. Doing so would definitely help the U.S. increase its exports in absolute amount.