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Better Friends, Better Trade?

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Abstract

Using a unique dataset on political relations between China and its key trading partners and a nonlinear model, we explore how improvements in bilateral political relationships influence trade outcomes under varying economic states. Our findings reveal that while stronger political ties (“better friends†) generally improve trade flows, this effect is not universal. During periods of weak domestic demand, bet- ter political relations do not significantly enhance trade performance. The results also exhibit heterogeneity across countries, indicating that the impact of political relations on trade flows differs depending on the specific economic condition and political context.

Suggested Citation

  • Li, Wenqi & Nguyen, Bao.H., 2026. "Better Friends, Better Trade?," Working Papers 2026-02, University of Tasmania, Tasmanian School of Business and Economics.
    • Handle: RePEc:tas:wpaper:65547630
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    Keywords

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    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F50 - International Economics - - International Relations, National Security, and International Political Economy - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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