How the "Rise of Great Power" Restrains Bilateral Trade Flows: Evidence from China and its Trading Partners

Abstract:This article employs the gravity model of trade to examine how political relations have impacted international trade in the Chinese context, specifically by incorporating discussion of China's political relations with its major trading partners. Using data from China's trading partners obtained between 1990 and 2019, the article uses the generalised method of moments (GMM) and lagged vector autoregression (VAR) model to investigate whether the associated geopolitical risks appear to be temporary or enduring. Empirical results have shown that political conflicts present lagged effects (three months later) on China's exports to other countries and total trade volume with other countries, but have instantaneous effects on China's imports from other countries. Additionally, Chinese President Xi Jinping has much greater political influence on trade compared to his two predecessors (Jiang Zemin and Hu Jintao). Such an increased level of power is due to a diplomatic policy shift in which the nation has moved away from "keeping a low profile" (taoguang yanghui) to focus on the "rise of great power" (daguo jueqi). The escalation of political tension between China and its major trading partners will continue to have negative impacts on trade until hegemony is fully realised.