This paper develops a methodology to assess the impact of a trade diversification strategy on aggregate import costs. Using granular bilateral import data for The Bahamas, we estimate that strategically reallocating about 2 to 3 percent of imports could reduce the annual import bill by 2 to 5 percent, depending on the degree of import substitution at the intensive and extensive margins. A large share of these savings is concentrated in a small number of source countries and product categories, indicating that a targeted strategy could yield prompt results and improve the current account to GDP ratio by 0.5 to 1.5 percent. The findings also shed light on the potential of trade diversification as a tool to alleviate some cost-of-living pressures in small open economies if accompanied by suitable reforms.
Julien Acalin (Sun,) studied this question.