Does Political Risk Lower Bilateral Trade Flow? A Gravity Panel Framework for Thailand Vis-a-Vis Her Trading Partners

Purpose – Political risk factors play a pivotal role in determining the bilateral trade flow of Asian countries in general and the Association for Southeast Asian Nations (ASEAN) countries in particular. The main purpose of this research paper is to examine the impact of disaggregated political risk in lowering the bilateral trade flow of Thailand, a prominent member of ASEAN, vis-a-vis her 132 trading partners.

Design/methodology/approach – Using panel data of Thailand with her partner countries for the period 1984–2015, this paper uses four different panel specifications named pooled ordinary least squares and random-effects estimations (estimated generalized least squares estimation) of three types by controlling for cross-sectional heteroscedasticity, time-wise heteroscedasticity, and contemporaneous correlation.

Findings – Holding other gravity-based determinants constant, for one unit increase in the ranking of indicator of the military in politics at home and abroad, trade flow decreases by 5–9% of the total trade flow of Thailand per year. For other types of political risks like government instability at home and abroad, difficulties in investment profile at home and abroad, and internal and external conflict at home and abroad, the decrease is also substantial and most statistically significant. The magnitude of loss due to the military channel at home and abroad can amount to US$9.38–US$16.88 bn per year for Thailand, after controlling for other gravity variables.

Research limitations/implications – The reasons for risk originating from different political channels could be explored at the regional or global level to understand their global and local dimensions. Practical implications – Policymakers should attempt to resolve the political risks at home and abroad in an amicable manner, through dialogue, so that bilateral trade flow is not inhibited.

Social implications – By taking economic reforms only, the trading problem cannot be resolved until and unless Thailand involves her society, politics, and administrative mechanisms in a conducive manner to facilitate her trade. A dialogue among bureaucracy, political authority, and military is beneficial in mitigating political risks.

Originality/value – The paper is unique in the sense that it makes a solid attempt to identify the potential channels of disaggregated political risk in affecting trade flow negatively, in a gravity framework, by controlling for different kinds of error structure.