The Effects of Institutions on the Relationship between Politics and Trade

Author Name Samuel HARDWICK (The Australian National University) / Shiro ARMSTRONG (Visiting Fellow, RIETI)
Creation Date/NO. April 2022 22-E-034
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First draft: April 2022
Revised: May 2022


This paper examines the relationship between trade and the ups and downs of political relations between countries, and how institutional arrangements might affect that relationship. An index of ‘political distance’ between countries is constructed using high-frequency events data. After showing that monthly data, rather than quarterly or annual data, better reflects the time horizon of political shocks to trade, we estimate a set of structural gravity models using monthly panel data. We find that WTO membership, democratic political systems and strong domestic governance institutions are associated with a reduced impact of political vagaries on trade between countries. Joint WTO membership is associated with a weaker relationship between politics and trade, including for non-democratic trading partners. This WTO effect is stronger when recent years (2017 to 2021) characterized by global trade uncertainty are excluded from the sample.