Allies and Enemies: On the Political Determinants of Trade in Critical Minerals

This paper examines the effect of political dissimilarity on the bilateral trade of critical minerals, which are essential for renewable energy and high-technology applications. Using UN voting similarity as a measure of political dissimilarity, we empirically examine how international relations impact trade flows. Moreover, we distinguish between processed and semi-processed goods, between commodities used in energy and digital applications and those not used in these sectors, and between products traded in concentrated versus diversified markets. Employing a gravity model over the period 1995-2022 and the Poisson Pseudo Maximum Likelihood (PPML) estimator, we account for zero trade flows and heteroskedasticity. Our analysis reveals that political dissimilarity with China and the United States is an important determinant of trade in critical minerals, particularly for semi-processed products, those used in energy and digital transitions, and products with more geographically concentrated markets. At the product level, minerals such as nickel, cobalt, vanadium, molybdenum, copper, and aluminum appear especially sensitive to strategic considerations. Finally, our findings are robust across different model specifications, particularly with respect to concerns about endogeneity between political dissimilarity and trade in critical minerals.