Trade Interdependence in the Modern Global Economy

Analyzing global trade interdependence requires an approach that incorporates fundamental features of the modern economy: intense trade in intermediates and the changing availability of alternative partners and substitute products. We use theoretical models of structural gravity to construct measures of dyadic dependence that directly incorporate these features. The measures describe (1) how much trade interruptions damage a country’s welfare and (2) how much additional trade it would take from their existing trade partners to compensate. We then show three important findings. First, the new measures differ from traditional measures based on aggregate trade statistics. Second, they show how, contrary to much common wisdom, the world has not marched inexorably toward greater interdependence. Third, we use China’s foreign assistance, as exemplified by the Belt and Road Initiative, to assess the consequences of one major government policy. Chinese assistance has increased partners’ dependence on China, without a reciprocal increase in Chinese dependence.