Openness to Trade and Supply-Chain Diversication Francesco Caselli Miklos Koren Milan Lisicky Silvana Tenreyro May 20, 2010 Abstract Extremely Preliminary I Introduction One of the most striking developments in the World economy over the past twenty years has been a substantial decline in macroeconomic volatility, particularly in advanced economies, followed by a sharp and sudden fall in output in 2008-2010. The patterns of cross-country trade have been the (amplied) mirror image of these changes in volatility: international trade has steadily increased during the period of moderation in output volatility, and then experienced a sharp contraction as GDP volatility shot up. Figure 1 illustrates the negative correlation between (decade-long) GDP volatility and trade shares (averaged over the cor- responding decade) for the biggest countries in the world (in terms of GDP) from 1970 to 2007. The correlation is strongly negative; it is also robust to the inclusion of country-specic e/ects, that is, for a given country, decades of more intense trade have seen lower volatility. 1