Trade Openness and Volatility

higher volatility than manufacturing as a whole, and differ among themselves as well. The
least volatile sector, food products, has an average standard deviation of 11%. The most
volatile sector is petroleum refineries, with a standard deviation of 23%.

Using our data, we can calculate the variance of the growth rate of total manufacturing
output per worker, and compare it with the variance of per capita GDP growth from Penn
World Tables. The scatterplot of that comparison, in logs, is presented in Figure 2, along
with a linear regression line. We can see that there is a close relationship between the
two, with the correlation coefficient of around 0.7. The volatility of manufacturing output
growth from the UNIDO dataset is considerably higher than the volatility of per capita
GDP growth from Penn World Tables. This is sensible, because manufacturing output is
a subset of GDP. Figure 3 reports a scatterplot of trade openness and volatility of the
manufacturing sector for the countries in the sample, along with a regression line. There
does seem to be a positive relationship between trade openness and volatility in our sample.
We now move on to an in depth analysis of this relationship at the sector level.

3 Results

Our results can be summarized as follows: trade openness has (i) a positive effect on sector-
level volatility; (ii) a negative effect on sector comovement with the rest of the manufacturing
sector; and (iii) a positive effect on a country’s specialization. These results are robust
across both cross-sectional and panel estimations, as well as to the battery of fixed effects
and controls which we use to deal with omitted variables and simultaneity issues.

3.1 Trade and Volatility within a Sector

We first analyze the effect of trade on the volatility of output within a sector (σ_i² , by esti-
mating equation (2)). Table 1 presents the cross-sectional results. The first column reports
the results of the most basic regression, while columns (2) through (4) add progressively
more fixed effects. Overall trade openness, measured as the share of exports plus imports
to total output in a sector, is always positively related to volatility. This result is robust to
the inclusion of any fixed effects and is very statistically significant, with t -statistics in the
range of 8-10. The point estimates are also quite stable across specifications.

Table 2 reports estimation results for the ten-year panel regressions. We include specifi-
cations with no fixed effects, country, sector, time effects separately and together, and then
interacted with each other. The most stringent specification, in terms of degrees of free-
dom, includes country×sector and time fixed effects. The coefficients on trade openness are
actually quite stable across specifications, being noticeably lower only in column (7), which

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