Diplomatic relations and agricultural trade

Abstract

Political conflicts often cause disruptions in agricultural trade, yet previous studies have not paid much attention to the food market. Focusing on China, this paper examines the impact of diplomatic relations on agricultural trade. We match a panel dataset on agricultural exports to China from 168 trading partners with our constructed ranking index of diplomatic relations. Using different strategies to address the endogeneity issue, our analysis finds robust evidence for a strong and positive effect of diplomatic affinity on bilateral agricultural export flows. Exploring the potential mechanisms, we uncover that the increased agricultural exports work primarily through enhancing bilateral communication. Based on a quantitative trade model with Stone-Geary preferences, we then quantify the welfare effects from changes in diplomatic relations. We show that an increase in the ranking of diplomatic relations with trading partners leads to welfare gains of 0.5-1.8% through agricultural trade.