Safer trade among democracies? Downward trade volatility and political regimes (1962-2018)

This paper examines the trade relations of the G7 countries from 1962 to 2018, categorising trade partners based on their political systems. First, it analyses trade openness depending on whether partners are democracies. Second, the paper introduces a trade risk measure related to a partner's political system, defined as the downward volatility of trade flows. This measure accounts for both the likelihood and severity of potential trade disruptions. The study finds that trade among democracies has shown less downward volatility than trade with non-democratic regimes. This finding continues to hold even after accounting for important characteristics of the trading partners, such as their level of development and the types of goods traded (primary products, manufactured goods, or exports). The lower volatility associated with democratic regimes is likely due to stronger institutional limits on executive power, which may lead to more stable policies and business environments.