The Trade Impact of the Creation/Disbandment of Diplomatic Relations: The Case Involving Mainland China and Chinese Taiwan

This study examines the impact of diplomatic realignments on bilateral trade flows in developing countries, focusing on nations that switched diplomatic allegiances from Chinese Taiwan to Mainland China between 1995 and 2019. Using aggregate bilateral trade data from Comtrade, the analysis uses a gravity model estimated with the Poisson pseudo‐maximum likelihood (PPML) method. Its findings indicate that, following the switch, exports to Mainland China declined, while exports to Chinese Taiwan remained largely unaffected. In contrast, imports from Mainland China increased, whereas imports from Chinese Taiwan declined. In particular, the asymmetric effects on trade with Mainland China suggest that developing countries do not fully harness the trade‐promoting benefits of economic diplomacy when establishing diplomatic ties. The study contributes to the literature on trade and economic diplomacy by providing empirical evidence on how diplomatic shifts shape trade dynamics in the developing world.