RIETI Seminar on the Relationship between Politics and Trade

EABER members contributed to the RIETI Seminar titled “Effects of Institutions on the Relationship between Politics and Trade.” They authored and presented a research paper that examined the correlation between trade and the fluctuations in political relations between countries, focusing on how institutional arrangements can shape this relationship. The paper constructed an index of political distance between countries using high-frequency events data. By demonstrating that monthly data provides a better reflection of the time horizon of political shocks to trade, the authors estimated a series of structural gravity models using monthly panel data. The findings highlighted that membership in the World Trade Organization (WTO), democratic political systems, and strong domestic governance institutions are associated with a reduced impact of political uncertainties on trade between countries. Additionally, joint WTO membership was found to weaken the relationship between politics and trade, even for non-democratic trading partners. Notably, this effect was particularly pronounced when excluding recent years (2017 to 2021), characterised by global trade uncertainty.