Do political relations affect international trade? Evidence from China\u2019s twelve trading partners

Gregory Whitten,Xiaoyi Dai,Yu Pang,Simon Fan

doi:10.1186/s41072-020-00076-w

Abstract

China’s growing influence on the world has generated profound effects on the political and economic decisions of her partner nations. Recent conflict escalation between China and western countries gives rise to widespread concern over the possibility of delinking China from global trade and supply chain. By drawing on utility theory, we suggest that the political relationship is a key determinant of collective emotions of consumers and trading companies and consequently the interactions between importers and exporters. We hypothesize that warmer relations lead to larger increases (or smaller decreases) in trade while cooler relations have the opposite effect. Based on monthly data of China and her twelve trading partners from 1981 to 2019, our study provides an empirical investigation into the association between political relationship and bilateral trade flows. Our results show that shocks to relations are highly persistent and frequently cause changes in trade. However, relations themselves are little influenced by changes in trade, changes that show little persistence. We also address the US-China trade war and the observation that innovations to China’s exports to the US improve China’s relations with the US while shocks to American exports to China worsen relations from China’s perspective.

Highlights

Globalization and economic integration is a salient feature of the modern world
One salient example is that former US Senator Sam Nunn claimed that stability on the Korean peninsula was an important motivation for accepting China into the World Trade Organization (WTO), which leads to greater US-Chinese trade (Martin and Roberts 2017)
In the event that we find at least one cointegrating vector, the third step is to estimate a vector error correction model (VECM) in Stata using the lag length identified by varsoc and the number of cointegrating vectors identified by vecrank and to estimate Impulse Response Functions (IRFs)

Summary

Introduction

Globalization and economic integration is a salient feature of the modern world. In particular, the increasing division of labor and fragmentation of supply chains have led to the globalization of production and shipping of many commodities and services, which has enhanced international economic cooperation. Greater trade flows provide supportive evidence of this cooperation (see Krugman, Obstfeld, and Melitz 2014). Against this trend of globalization, international politics is not necessarily becoming more cooperative, an idea that had been promoted in the popular press and academia (Friedman 2000, Mandelbaum 2003, Witt 2019). Over the past four decades, China has substantially increased its exports and imports of manufactures and services and has emerged in the global marketplace with greater economic significance and more prominent political influence (Lukin 2019). China has often been the target of criticism in some Western media for not strictly following international norms These criticisms tend to generate a heated reply from the Chinese mainstream media. Investigating the links between China’s political and economic influences emerges as a reasonable line of inquiry

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