Jul 9, 2010

Do countries fail to trade because they hate each other?

In a discussion paper that came out 5 years ago, Thierry Mayer and co-author had suggested bilateral opinions were correlated with trade flows. However, the direction of causality was not clear. Do countries hate each other because they don't trade enough or do they fail to trade because they hate each other?

To answer that question, "Freedom Fries", a new paper in AEJ Applied looks at the case of the deterioration of US/France relationships following the invasion of Iraq. From 2002–2003,  France’s favorability rating in the US fell by 48 percentage points and this, the authors find, may have reduced bilateral trade by about 9% and trade in inputs by about 8%.

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