Critically important: The heterogeneous effect of politics on trade

Arbeitspapier

The proliferation of international supply chains makes the domestic production of goods increasingly dependent on inputs from foreign sources. By expanding their sourcing portfolio to foreign suppliers, firms and by extension entire economies are more prone to the trade effects of adverse bilateral political shocks. In this paper, we analyze the relation between political relations and trade at lower levels of aggregation, allowing for a heterogeneous effect by types of inputs. We show that a negative shock to political relations has a more pronounced effect on trade of critical goods, conditional on the ease of switching suppliers. We construct a simple model exhibiting input-output linkages to clarify the mechanisms at play, from which we derive testable predictions. Using a new measure for countries' dependence on these critical inputs, we then test the proposed mechanism in a difference-in-differences framework. To address potential endogeneity issues we perform an event study, in which the treatment is an exogenous adverse political shock. Using a new dataset on the status of diplomatic representation and monthly trade data, we exploit the recalling or summoning of the ambassador of a country as a shock to bilateral political relations.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Kiel Working Paper ; No. 2092

Classification and Topics

• Classification: Wirtschaft ; Trade Policy; International Trade Organizations ; Empirical Studies of Trade ; International Conflicts; Negotiations; Sanctions ; National Security; Economic Nationalism
• Subject: Trade frictions ; Political Relations ; Dependence ; Input Sourcing

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hinz, Julian ; Leromain, Elsa
• Event: Veröffentlichung
• (who): Kiel Institute for the World Economy (IfW)
• (where): Kiel
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/171241
• Last update: 10.03.2025, 11:44 AM CET