Trade openness and political distortions

In this paper, we explore the relationship between international trade openness and two major political distortions, political uncertainty, and political polarization. We consider two measures of trade openness, the trade expenditures and the number of trade partners, as well as their volatility. As political distortions and trade characteristics of the country are endogenously related, we instrument the political uncertainty by the standard deviation of the effective political leaders’ ages of a country and the minimum age of the political leaders of a country's neighbors. We find that political uncertainty reduces the level of trade openness and increases the volatility of trade openness while political polarization negatively affects both the level and the volatility of trade openness. We propose a simple theoretical model that provides the intuition on the relationship between political distortions and trade openness.