On the time-varying impact of China’s bilateral political relations on its trading partners: “doux commerce” or “trade follows the flag”?

33 Pages Posted: 14 Dec 2023 Last revised: 29 Apr 2024

See all articles by António Afonso

António Afonso

Technical University of Lisbon (UTL) - Department of Economics; UECE (Research Unit on Complexity and Economics); ISEG Lisbon School of Economics and Management,Universidade de Lisboa; REM - Research in Economics and Mathematics

Valerie Mignon

CEROS, Paris Nanterre University

Jamel Saadaoui

University of Paris 8 Vincennes-Saint Denis

Date Written: April 4, 2024

Abstract

We assess the impact of China’s bilateral political relations with three main trading partners—the US, Germany, and the UK—on current account balances and exchange rates, over the 1960Q1-2022Q4 period. Relying on the lag-augmented VAR approach with time-varying Granger causality tests, we find that political relationships with China strongly matter in explaining the dynamics of current accounts and exchange rates, supporting the “trade follows the flag” view. Such relationships cause the evolution of the exchange rate (except in the UK) and the current account; these causal links being time-varying for the US and the UK and robust over the entire period for Germany. These findings suggest that policymakers should account for bilateral political relationships to understand the global macroeconomic consequences of political tensions.

Keywords: Political relations, time-varying causality, lag-augmented vector autoregression, China

JEL Classification: C22; F51; Q41

Suggested Citation

Afonso, António and Mignon, Valerie and Saadaoui, Jamel, On the time-varying impact of China’s bilateral political relations on its trading partners: “doux commerce” or “trade follows the flag”? (April 4, 2024). BETA WP 2024-17, China Economic Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4645616

António Afonso (Contact Author)

Technical University of Lisbon (UTL) - Department of Economics ( email )

R. Miguel Lupi, 20
Lisbon, 1248-078
Portugal
+351 21 392 5985 (Phone)
+351 21 396 6407 (Fax)

HOME PAGE: http://www.iseg.ulisboa.pt/aquila/homepage/aafonso/research

UECE (Research Unit on Complexity and Economics) ( email )

Rua Miguel Lupi 20
Lisbon, 1249-078
Portugal
+351-213 925 912 (Phone)
+351-213 971 196 (Fax)

HOME PAGE: http://uece.rc.iseg.ulisboa.pt/

ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

REM - Research in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal

HOME PAGE: http://rem.rc.iseg.ulisboa.pt/

Valerie Mignon

CEROS, Paris Nanterre University ( email )

200 avenue de la République
NANTERRE, 92000
France

Jamel Saadaoui

University of Paris 8 Vincennes-Saint Denis ( email )

Paris
France

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