Does US Partisan Conflict Affect US China Bilateral Trade?

Abstract

It is well known that the US political parties hold opposing views on many economic policies and foreign policies. Since China has become the largest trading partner of the US, the operation of the US-China bilateral relationship has developed into an essential and sensitive political issue that has been widely discussed in the recent US presidential elections campaigns. Therefore, the understanding of the effects of partisan conflicts on the US-China trade is crucial to improving our knowledge of the international transmission of political uncertainty. Using a recent US partisan conflict index provided by Azzimonti (2014), we investigate those effects employing a structural VAR model and find that a one standard deviation shock to US partisan conflict is associated with a 2% increase in the US exports to China and a 2% reduction in its imports from China. Such effects are still significant after one year. The results are robust across various combinations of variables, models and sample periods. Further, our findings indicate that partisan conflicts in the US may reduce its trade deficit with China.

Keywords: Partisan conflict, Economic Policy Uncertainty, US–China bilateral trade, Structural VARs.

JEL Classification: E32 F42 D72