Critically important: The heterogeneous effect of politics on trade

Julian Hinz and Elsa Leromain

No 2018/68, RSCAS Working Papers from European University Institute

Abstract: There is strong empirical evidence showing that political relations have an impact on aggregate bilateral trade flows. In this paper, we show that the impact is heterogeneous across products, depending on product characteristics. Specifically, imported products used as intermediate inputs intensively may be more sensitive to adverse shocks. This is particularly relevant in the current context of increased international input linkages. We sketch a simple theoretical framework and test the mechanism in reduced-form. We implement a difference-in-differences approach with monthly trade flows and a novel dataset of diplomatic incidents. We find that a negative shock to political relations leads to a general decrease in trade flows, and that the response is larger for products in markets with low price gaps to alternative sourcing partners and high direct and indirect imported input use.

Keywords: Trade frictions; political relations; dependence; input sourcing (search for similar items in EconPapers)
JEL-codes: F14 F15 F51 F52 (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-int and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Critically important: The heterogeneous effect of politics on trade (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:rsc:rsceui:2018/68

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