Do Product and Geographic Diversification Mitigate the Impact of Global Trade Shocks?

Abstract

This paper analyzes how product and geographic diversification affected the export performance of firms during the 2008-2009 trade collapse and the trade slowdown since 2012. Detailed transaction-level customs data from Taiwan over the period 2005-2014 indicate that product diversification during the pre-crisis stage significantly helped to mitigate the effect of the trade collapse on exports. Strong evidence also points to the important role of geographic diversification in mitigating the effect of the trade slowdown on exports. Based on these results, this study recommends the diversification of the export structure in terms of products and market destinations to attenuate the impact of global trade shocks. However, the effectiveness of a particular type of diversification remains dependent on the nature of the shock.