The effects of political shocks on international trade: evidence from China and major partners, 1998-2018

The purpose of this study is to examine the effects of political cooperation and conflict between countries on international trade in the context of China's rapid emergence as a global economic and trading power. The study develops a game-theoretical framework in which a bi-directional relationship exists between trade and conflict. The theoretical framework is used as a basis to identify the short- and long-term effects of moderate shocks in political conflict on merchandise goods trade between China and major trading partners between 1998-2018 using vector-auto-regression (VAR) models. The analysis is complemented by an examination of the effects of political shocks on trade disaggregated by product-type. The results suggest that although trade ties are not independent of conflict, they have not been affected by conflict significantly in this period, and the effects of political conflict on trade vary by product-type. The maintenance of a combination of healthy trade and low levels of conflict requires continued rules-based engagement between China and its trading partners to mitigate the extent to which political conflict has spill over consequences on trade ties