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Trading with Friends in Uncertain Times

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  • Adam Jakubik
  • Michele Ruta

Abstract

In this paper we seek to answer the question of how the patterns of bilateral trade are altered by rising trade policy uncertainty (TPU). Specifically, we investigate whether geopolitical alignments between country pairs determine how bilateral trade flows react during periods of greater uncertainty. Using a structural gravity framework augmented with a text-based TPU index and a geopolitical distance measure based on UN General Assembly voting records, we find a significant negative effect of the latter when TPU is elevated, indicating a shift to trading among “friends” in uncertain times.

Suggested Citation

  • Adam Jakubik & Michele Ruta, 2023. "Trading with Friends in Uncertain Times," IMF Working Papers 2023/124, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/124
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    Cited by:

    1. Kerola, Eeva & McCully, Tuuli & Nuutilainen, Riikka, 2024. "Trade with Chinese characteristics - economics versus politics," BOFIT Discussion Papers 8/2024, Bank of Finland Institute for Emerging Economies (BOFIT).
    2. Aiyar, Shekhar & Malacrino, Davide & Presbitero, Andrea F., 2024. "Investing in friends: The role of geopolitical alignment in FDI flows," European Journal of Political Economy, Elsevier, vol. 83(C).
    3. Blanga-Gubbay, Michael & Rubínová, Stela, 2023. "Is the global economy fragmenting?," WTO Staff Working Papers ERSD-2023-10, World Trade Organization (WTO), Economic Research and Statistics Division.
    4. Han Qiu & Dora Xia & James Yetman, 2024. "Deconstructing global trade: the role of geopolitical alignment," BIS Quarterly Review, Bank for International Settlements, September.

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    More about this item

    Keywords

    trade policy uncertainty; geopolitical distance; trade patterns; textual analysis; World uncertainty index; trade pattern; benchmark result; text-based TPU index; importer-exporter FE; Trade policy; Trade balance; Plurilateral trade; Trade tensions; Trade barriers; Global;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F50 - International Economics - - International Relations, National Security, and International Political Economy - - - General

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