Title : Does Partner Country’s Attitude Matter for Bilateral Trade Flow? A Panel GMM Factor Analysis Approach


Authors : Gour Gobinda Goswami, Fidia Farah, Rafe R. Hannan

Abstract : Abstract The main purpose of this study is to examine the role of political risk in deterring trade flow across the border all over the world. Specifically, we would like to examine if political risk lowers trade flow in a dynamic gravity panel framework. Our analysis is the most comprehensive one in terms of data coverage by considering 139 domestic countries (199,968) with their applicable partner countries from 1984 to 2015. In the base equation lagged real trade flow, real GDP of domestic and partner countries, existence of free trade agreement, no island, no landlocked status, distance, etc. play important role. Using International Country Risk Guide (ICRG) political risk data in the framework of gravity equation, this paper is unique in exploring the attitude of the partner’s country as an underlying risk factor, which is silently lowering trade flow across the border by at least 1.02 million US dollars on average no matter what the type of country is. As an anecdote, this paper finds that both OECD countries trade substantially higher than otherwise, both non-OECD trades the least, and OECD with non OECD are in the middle of these two extremes, which is reasonable. Both OECD countries trade 212.72 million USD more compared to their non OECD pair, both non-OECD trades 2.77 million USD less, OECD with non-OECD trades 2.20 million USD more compared to their counterpart after controlling for all the gravity variables. As political tension between countries is detrimental to a smooth flow of goods and services across the border, conflict resolution dialogue among policymakers and politicians is necessary to curve the problem. Countries nowadays are interconnected. That’s why, any action or signal in one place has a global impact in the sense that it affects subjective feeling about her trading partners and this must be sensible enough to promote trade flow. Only improvement in Governance structure is not sufficient. Partner countries must feel that the governance of the host country is good enough to engage in trade or commerce. Keywords: Trade flow; bilateral trade flow; gravity equation; political risk; factor analysis, Panel GMM; partner country’s attitude; cultural conflict; governance failure JEL Classification: F1


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