A MEASURE OF NET DEPENDENCY BETWEEN THE ECONOMIES OF THE USA AND ITS MAJOR TRADING PARTNERS

Abstract

(ProQuest: ... denotes formulae omitted.)1. IntroductionAs per conventional wisdom, and as outlined in Chapter 7 of Council of Economic Advisers' (CEA) 2015 Economic Report of President, USA, international trade contributes to well-being of nations through enhanced productivity, more innovative activity, higher living standards, higher wages, increased economic growth, better working conditions, stronger environmental protection, broader inclusion and participation. The same report states that (p. 5) the process of globalization ... can also create challenges in areas like income inequality. For this reason, it is critical that globalization is managed. (A portion of report's introduction may be found in Appendix I.) The report concludes (p. 47) as follows:Through trade linkages, world's economies are more interdependent than at any time in history. This interdependence has been supported not only by steep declines in costs of international communication and shipping, but also by a reduction in governmental barriers to cross-border movement of goods, services, and investment. Increasingly, economies are linked by production processes that cross international borders so as to minimize costs by better exploiting local comparative advantages.Without a doubt international trade improves wellbeing of nations and, simultaneously, it makes their economies more interdependent. Interdependency may serve as a bridge for exchange of good fortune (for example, among other, welfare enhancing goods and services, access to resources and markets) and bad fortune (for example, among other, welfare damaging imports, unfair trade sanctions, monopoly or cartel exploitation.) Naturally, one may wonder: when two nations trade, are they equally or unequally interdependent upon each other? Logically, interdependency between nations would be affected by relative size of trading economies, proximity, trade treaties, importance of good as capital good (for example, rare earth metals), new technologies (for example, electronic connectivity) and many other factors.Drawing upon past work (Kantarelis, 1997), objective in this paper is to propose a measure of bilateral trade interdependency, more specifically, a measure of bilateral net dependency between counties i and j. In brief, I propose to measure dependency between two nations i and j as ratio of trade between them over country's respective GDP plus imports from trading partner or, for country i,...(Dwhere, D = i's dependency on j, X = exports from i to j, a, = weight of importance that i attaches on its imports from j (0 ... (2)The difference between (1) and (2) may serve as a measure of net dependency (ND) between i and j or,... (3)Obviously, D^sub ij^ may fluctuate in interval 0