Impact of political dispute on international trade based on an international trade Inoperability Input-Output Model: A case study of the 2012 Diaoyu Islands Dispute

Abstract

While political disputes occur frequently and widely among many countries, their impact on the international trade is unclear and less systematically investigated. Considering the 2012 Diaoyu Islands Dispute, under several premised assumptions, this paper applies the international trade Inoperability Input-Output Model to determine the indirect economic loss and to screen out Chinese industries that are sensitive to the dispute. Results based on Leontief's technical coefficients matrix show that the total indirect economic loss of China's gross trade is between RMB 540.4226 billion and RMB 1023.3068 billion. Industries that are sensitive to the dispute include electrical equipment and machinery, general special equipment manufacturing, metal smelting and rolling processing, manufacture and processing of metals and metal products, and chemical. The empirical findings suggest that China establish an early-warning mechanism and trade assistance system, so that key industries that were damaged could be properly compensated.