Does Openness Matter for Structural Change?

This paper develops a novel framework to assess the contribution of openness and trade to structural change. I develop an identity-based decomposition to study the evolution of the share of manufacturing value added at country level, and apply it to a sample of 20 large manufacturing exporters relying on sectoral data from the World Input-Output Database for the years 1995-2007. The analysis features two new mechanisms of structural change, arising from changes in sectoral competitiveness in international markets, and changes in the size of the foreign market. The average contribution of these channels to structural change is 33 and 34 percent, respectively. This suggests that, by omitting trade, closed economy analyses may be severely limited. To investigate the driving forces underlying structural change, I rely on a quantitative model building on Eaton and Kortum (2002) and simulate the effects of shocks to trade costs and trade deficits on the manufacturing value added shares of China, Germany, the United Kingdom and the United States. I find that shocks to trade costs and trade imbalances play a key role as drivers of structural change. They explain most of the change in the manufacturing value added shares in China and the United States. They contribute significantly, alongside shocks to sectoral productivity levels, in Germany and the United Kingdom.