Geopolitics and International Trade: The Democracy Advantage

Serhan Cevik

No 2024/021, IMF Working Papers from International Monetary Fund

Abstract: Do political regimes determine how geopolitics influence international trade? This paper provides an empirical answer to the question by analyzing the joint impact of democracy and geopolitical distance between countries with an augmented gravity model of bilateral trade flows and an extensive dataset of more than 4 million observations on 59,049 country-pairs over the period 1948–2018. Implementing the Poisson Pseudo-Maximum Likelihood regression and the two-stage least squares with instrumental variable approach, I find that geopolitical developments are not as important as income and geographical distance in determining bilateral trade flows and that democracy fosters international trade and moderates the potential negative impact of geopolitics. While the impact of democracy and its interaction with geopolitical distance are significant across all countries, the magnitude of these effects is substantially larger in advanced economies than in developing countries, reflecting the greater strength of democratic institutions, on average, in advanced economies.

Keywords: Geopolitics; democracy; international trade; gravity model; democracy advantage; impact of democracy; country pair; destination countries help; trade globalization; Trade balance; Plurilateral trade; Gravity models; General Agreement on Tariffs and Trade; Global (search for similar items in EconPapers)
Pages: 19
Date: 2024-02-02
New Economics Papers: this item is included in nep-int and nep-pol
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