Montesquieu may be wrong… [UPDATED VERSION, April 2024]

Commerce is a cure for the most destructive prejudices…wherever we find agreeable manners, there commerce flourishes; and that wherever there is commerce, there we meet with agreeable manners.

When two nations come into contact with one another, they either fight or trade. If they fight, both lose; if they trade, both gain.

Peace is the natural effect of trade. Two nations who traffic with each other become reciprocally dependent…their union is founded on their mutual necessities.

Montesquieu, The Spirit of Laws, 1748

We have an updated version of this WP with a new title and new results for India, Japan, and South Korea:

On the time-varying impact of China’s bilateral political relations on its trading partners: “doux commerce” or “trade follows the flag”?

UPDATED WORKING PAPER: We assess the impact of China’s bilateral political relations with three main trading partners—the US, Germany, and the UK—on current account balances and exchange rates, over the 1960Q1-2022Q4 period. Relying on the lag-augmented VAR approach with time-varying Granger causality tests, we find that political relationships with China strongly matter in explaining the dynamics of current accounts and exchange rates, supporting the “trade follows the flag” view. Such relationships cause the evolution of the exchange rate (except in the UK) and the current account; these causal links being time-varying for the US and the UK and robust over the entire period for Germany. These findings suggest that policymakers should account for bilateral political relationships to understand the global macroeconomic consequences of political tensions.

You are welcome to download, share, or comment on the following working paper:

• António Afonso, Valérie Mignon, Jamel Saadaoui (April 4, 2024), On the time-varying impact of China’s bilateral political relations on its trading partners: “doux commerce” or “trade follows the flag”? BETA Working Paper 2024-17: https://ssrn.com/abstract=4645616