Does Trade Still Follow the Flag?

Abstract

A public choice approach is used to build a model of bilateral trade flows employing international conflict and cooperation, as well as prices and income, to predict the level of imports. The model is consistent with neoclassical trade theory in economics, while employing data and measurement insights from the field of international relations to construct an indicator of bilateral diplomatic relations. The model is empirically tested using pooled, cross-section time-series analysis for six nations representing different worlds of development. Considerable empirical support is found for the model in general. The effects of diplomacy on commerce are significant and conform to model predictions in every instance. Estimation results also indicate possible cross-national differences in the political management of trade relations.