Critically Important: The Heterogeneous Effect of Politics on Trade

28 Pages Posted: 20 Dec 2018

See all articles by Julian Hinz

Julian Hinz

European University Institute

Elsa Leromain

London School of Economics & Political Science (LSE) - London School of Economics

Date Written: December 2018

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

JEL Classification: F14, F15, F51, F52

Suggested Citation

Hinz, Julian and Leromain, Elsa, Critically Important: The Heterogeneous Effect of Politics on Trade (December 2018). Robert Schuman Centre for Advanced Studies Research Paper No. RSCAS 2018/68, Available at SSRN: https://ssrn.com/abstract=3304614 or http://dx.doi.org/10.2139/ssrn.3304614

Julian Hinz (Contact Author)

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Elsa Leromain

London School of Economics & Political Science (LSE) - London School of Economics ( email )

United Kingdom

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