Critically important: The heterogeneous effect of politics on trade

Julian Hinz and Elsa Leromain. Forthcoming in the Review of Industrial Organization.

Impact of diplomatic tensions on UK - Russia trade. Russian exports to UK and EU (left), Russian exports to UK by select HS sections (right).

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.

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