How Political Relations Affect Trade: Firm-Level Evidence from the Belt & Road

Jiejin Xia, Xingting Wang, Haicheng Wang and Helian Xu

Emerging Markets Finance and Trade, 2025, vol. 61, issue 8, 2247-2262

Abstract: This paper analyzes the effect of political relations on trade from demand and supply channels based on firm-level panel data between China and the Belt & Road countries. We specify a theoretical model to derive how political relations affect trade, and our empirical results demonstrate a positive trade-promoting effect of improved political relations. Consumers change their preference and purchase decisions under the influence of political relations, whereby the significant effect is observed among final goods. The supply channel tests reveal that the trade effect of political relations for state-owned firms is the most pronounced, which mirrors the role of state-owned firms in politicizing trading decisions. Overall, our research sheds light on understanding how political relations affect trade within the demand-supply framework, and provides firm-level evidence in the context of the Belt & Road.

Date: 2025
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DOI: 10.1080/1540496X.2024.2447466

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