Critically Important: The Heterogeneous Effect of Diplomatic Tensions on Trade
- PDF / 1,015,436 Bytes
- 23 Pages / 439.37 x 666.142 pts Page_size
- 20 Downloads / 167 Views
Critically Important: The Heterogeneous Effect of Diplomatic Tensions on Trade Julian Hinz1 · Elsa Leromain2,3
© The Author(s) 2020
Abstract With global value chains interlocking today’s economies, what is the impact of diplomatic tensions on international trade? We exploit variation in monthly data on imports, a measure of imported input use in the domestic economy, and the incidence of bilateral diplomatic tensions to show that their impact on trade is heterogeneous across countries and industries. Trade in industries that are crucial for domestic production is more sensitive to political tensions. We expose the underlying mechanism in a simple framework before testing it in reduced form. Keywords Diplomatic tensions · Political relations · Trade “Multinationals are very nervous now, and they should be. [...] In the past, only some sectors—mining, oil and gas, commodity companies—had to worry about geopolitics. Now companies that make fizzy drinks or handbags or chocolate are finding their supply chains, their markets, their operations completely blown apart by geopolitical risks and unfavorable treatment.” — Mark Leonard, co-founder of the European Council on Foreign Relations.1
1
From “The great unraveling of globalization”, Washington Post by Jeffrey Rothfeder on April 24, 2015.
Formerly circulated under the title “Politics of Global Value Chains”. * Julian Hinz [email protected] Elsa Leromain [email protected] 1
Kiel Institute for the World Economy, and Kiel Centre for Globalization, Kiellinie 66, 24105 Kiel, Germany
2
IRES/LIDAM, Université Catholique de Louvain, Place Montesquieu 3/L2.06.01, 1348 Louvain‑la‑Neuve, Belgium
3
Centre for Economic Performance, London School of Economics, London, UK
13
Vol.:(0123456789)
J. Hinz, E. Leromain
1 Introduction Recent years have seen a resurgence of political tensions between countries. While occasions when states threaten the use of military force are rare, diplomatic tensions are frequent. Flare-ups of disagreement or personal hostility between the leaders of two countries increases uncertainty of the future of bilateral political relations. At the same time, the proliferation of international supply chains has made 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. The political fall-out of the poisoning of Sergei and Yulia Skripal is a case in point. In early March 2018 the former Russian spy and his daughter were poisoned with a military-grade nerve agent of a type developed by Russia.2 The British Prime Minister made a statement in parliament, seeking an explanation from Russia.3 By March 14, the UK had expelled 23 Russian diplomats who were identified as undeclared intelligence officers and had suspended all planned high-level contact. On March 17, Russia summoned the United Kingdom’s ambassador to Russia; 33 members
Data Loading...
