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China’s growing influence on the world has generated profound effects on the political and economic decisions of her partner nations. Recent conflict escalation between China and western countries gives rise to widespread concern over the possibility of delinking China from global trade and supply chain. By drawing on utility theory, we suggest that the political relationship is a key determinant of collective emotions of consumers and trading companies and consequently the interactions between importers and exporters. We hypothesize that warmer relations lead to larger increases (or smaller decreases) in trade while cooler relations have the opposite effect. Based on monthly data of China and her twelve trading partners from 1981 to 2019, our study provides an empirical investigation into the association between political relationship and bilateral trade flows. Our results show that shocks to relations are highly persistent and frequently cause changes in trade. However, relations themselves are little influenced by changes in trade, changes that show little persistence. We also address the US-China trade war and the observation that innovations to China’s exports to the US improve China’s relations with the US while shocks to American exports to China worsen relations from China’s perspective.
Bibliographical noteThis paper supersedes an early version titled “The effect of China’s political relations on her international trade”, which was presented at the 2016 Biennial Conference of Hong Kong Economic Association. We thank two anonymous reviewers for valuable comments, Yifan Zhang for some extensive discussions, and Baosi Meng for research assistance.
The Direct Allocation Grant of Lingnan University (DS14A4) is gratefully acknowledged.
- International trade
- Political tensions
WHITTEN, G. W., DAI, X., FAN, C. Z. S. & ZHANG, Y., 13 Dec 2016. 28 p.
Research output: Other Conference Contributions › Conference Paper (other) › Research › peer-review