Beyond Vulnerability: When Trade Dependence Fuels Growth

This paper challenges the conventional view that trade dependence is inherently detrimental to countries, with a focus on a nation’s main trade partner. Estimat ing structural VAR models for four countries- Chile, Mexico, The Netherlands and Portugal, which have distinct main trade partners- initial findings reveal that higher trade flows as a share of GDP do not necessarily correspond to greater economic reliance. A sectoral approach focusing on key exports (copper for Chile, electrical machinery for Mexico and the Netherlands, and tourism for Portugal) proves more effective, explaining a minimum of 25% of the respec tive business cycle fluctuations in the medium run. Historical decomposition analysis demonstrates that trade dependence has a double edged effect: while contributing to recessions during crises, it equally serves as an important source of economic expansion, particularly post-crisis. Impulse-response functions con f irm medium-term economic growth for Chile, Mexico and The Netherlands, and short-term expansion for Portugal. This paper concludes that trade dependence can be beneficial, emphasising the need for country-specific analyses and tailored policy approaches, as illustrated by contrasting Chile’s stable relation of copper exports to China with Mexico’s more precarious USA dependence facing Chinese competition and protectionist measures. JEL Classification: E32 , E61 , F14 , O11