Does political conflict affect bilateral trade or vice versa? Evidence from Sino-U.S. relations

Abstract

This paper investigates the dynamic causal relationship between Sino-U.S. political conflict and bilateral trade using a time-varying (bootstrap) Granger full-sample causality test and sub-sample rolling window estimation. The result indicates that Sino-U.S. political conflict and bilateral trade may interact in various ways. Bilateral trade has both positive and negative effects on political conflict in several sub-phases, and in turn, political conflict has the same impacts on bilateral trade. In general, the relationship between Sino-U.S. political conflict and bilateral trade is not always consistent with the model of Polachek, which states bilateral trade has significantly reduced political conflict. In the face of a severe economic situation, China and the U.S. government should strengthen trade cooperation and seek common ground of economic interests in order to expand the improvement of political relations.