State Control and the Effects of Foreign Relations on Bilateral Trade

University of Heidelberg Department of Economics Discussion Paper Series No. 576

55 Pages Posted: 7 Nov 2014

See all articles by Christina Davis

Christina Davis

Princeton University - Woodrow Wilson School of Public and International Affairs; Princeton University - Department of Political Science

Andreas Fuchs

University of Goettingen (Gottingen) - Faculty of Economics and Business Administration; Kiel Institute for the World Economy

Kristina Johnson

Collins Center for Public Management, University of Massachusetts Boston

Multiple version iconThere are 2 versions of this paper

Date Written: October 28, 2014

Abstract

Do states use trade to reward and punish partners? WTO rules and the pressures of globalization restrict states’ capacity to manipulate trade policies, but we argue that governments can link political goals with economic outcomes using less direct avenues of influence over firm behavior. Where governments intervene in markets, politicization of trade is likely to occur. In this paper, we examine one important form of government control: state ownership of firms. Taking China and India as examples, we use bilateral trade data by firm ownership type, as well as measures of bilateral political relations based on diplomatic events and UN voting to estimate the effect of political relations on import and export flows. Our results support the hypothesis that imports controlled by state-owned enterprises (SOEs) exhibit stronger responsiveness to political relations than imports controlled by private enterprises. A more nuanced picture emerges for exports; while India’s exports through SOEs are more responsive to political tensions than its flows through private entities, the opposite is true for China. This research holds broader implications for how we should think about the relationship between political and economic relations going forward, especially as a number of countries with partially state-controlled economies gain strength in the global economy.

Keywords: International trade, Diplomatic tensions, State-owned enterprises, Firm ownership, Event data, UN voting, China, India

JEL Classification: D74, F13, P16, P26

Suggested Citation

Davis, Christina and Fuchs, Andreas and Johnson, Kristina, State Control and the Effects of Foreign Relations on Bilateral Trade (October 28, 2014). University of Heidelberg Department of Economics Discussion Paper Series No. 576. Available at SSRN: https://ssrn.com/abstract=2519539 or http://dx.doi.org/10.2139/ssrn.2519539

Christina Davis

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

Princeton University - Department of Political Science ( email )

Corwin Hall
Princeton, NJ 08544-1013
United States

Andreas Fuchs (Contact Author)

University of Goettingen (Gottingen) - Faculty of Economics and Business Administration ( email )

Platz der Goettinger Sieben 3
Goettingen, 37073
Germany

Kiel Institute for the World Economy ( email )

Kiellinie 66
Kiel, Schleswig-Hosltein 24105
Germany

Kristina Johnson

Collins Center for Public Management, University of Massachusetts Boston ( email )

100 William T Morrissey Blvd
Healey Library, 10th Fl.
Boston, MA 02125
United States

HOME PAGE: http://www.umb.edu/cpm

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