Assessing Systemic Trade Interconnectedness - An Empirical Approach

Assessing Systemic Trade Interconnectedness - An Empirical Approach. By Luca Errico & Alexander Massara

Summary: The paper focuses on systemically important jurisdictions in the global trade network, complementing recent IMF work on systemically important financial sectors. Using the IMF’s Direction of Trade Statistics (DOTS) database and network analysis, the paper develops a framework for ranking jurisdictions based on trade size and trade interconnectedness indicators using data for 2000 and 2010. The results show a near perfect overlap between the top 25 systemically important trade and financial jurisdictions, suggesting that these ought to be the focus of risk-based surveillance on cross-border spillovers and contagion. In addition, a number of extensions to the approach are developed that can provide a better understanding of trade dynamics at the bilateral, regional, and global levels.


Conclusions

The paper has laid out our approach for assessing systemic trade interconnectedness using network analysis and the IMF’s DOTS database. Our results uncover several stylized facts offering additional insights into the changing patterns of global trade over the decade 2000-2010.  We also have shown possible applications of our approach to gain a better understanding of trade dynamics across world regions and the overlapping of trade and financial sectors of systemic importance in the top 25 jurisdictions. Our approach lends itself easily to a wide range of analytical exercises addressing specific global trade issues, as well as global (trade and financial) interconnectedness issues.

The use of DOTS has lent robustness to our analysis by providing uniform data for 169 jurisdictions representing almost 100 percent of total world trade in both the year 2000 and the year 2010. Additionally, the quarterly updating of DOTS makes it possible to recalibrate our findings to track global trade developments on a timely basis.

From a policy perspective, jurisdictions hosting both systemic trade and financial sectors would seem to be the natural focus of risk-based surveillance on cross-border spillovers and contagion.  The analysis underscores that these jurisdictions display the strongest inter-sectoral interconnectedness to the global economy. As such, they have the highest potential for transmitting disturbances to other jurisdictions or to systemic stability via either the trade or financial channel or indeed both channels simultaneously. These jurisdictions would thus seem to warrant particular attention and further analysis on the risks associated with their activities, especially when carried out through systemically important financial institutions and nonfinancial corporations.

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