2024 - Volume 27, Issue 1

Political Relations And Bilateral Trade: Evidence From China And Trading Partners

By Yifei CAI, Yanrui WU and Tsangyao CHANG

Abstract: This study examines the causal relationship between political relations and bilateral trade involving China and its 12 primary trading partners. Through the utilization of bootstrapping Panel Granger causality test and generalized impulse response functions, our findings reveal that countries such as the US, Japan, Russia, Germany, Pakistan, and Indonesia are categorized into the "Flag Group", signifying a unidirectional causality running from political relation to trade. In contrast, the "Trade Group" encompasses the UK, France, India, Australia, and Vietnam, emphasizing the unidirectional causality from trade to political relation. Lastly, South Korea is identified as the "Neutral Group," suggesting a lack of causality between political relations and trade in this particular context. In addition, more sophisticated relations among positive and negative political relations and trade surplus and deficit are tested using generalized impulse response functions. The empirical results yield significant policy implications for both China and its trading partners.

Keywords: Political relations; bilateral trade; causality test; bootstrapping; China

JEL codes: F5, F1, C22

DOI: ...