Economics Working Papers

Publication Date

11-25-2020

Number

20024

Abstract

Political and economic tensions, which often jeopardize trade, are rising among the world’s major powers. Previous literature largely focuses on how brief, short-lived political tensions affect bilateral trade; however, little is known about firm-level trade responses to long-term political tensions. This paper investigates how firms respond to long-term political tensions by examining the Norway-China political tensions that lasted for six years. In particular, we use an event study approach to examine China's seafood importers' response to China's 2010 sanction on Norwegian fresh salmon after Norway awarded Liu Xiaobo, a Chinese political dissident, a Nobel Peace Prize. Our results reveal firm-level responses at both the extensive and intensive margins. At the intensive margin, firms that imported Norwegian fresh salmon before the sanction saw a dramatic and persistent decline in their imports of fresh salmon products from Norway ranging from 89% to 96%. At the extensive margin, we not only find a trade diversion effects of firms importing from other countries and less firms importing fresh salmon from Norway, but also a permanent "political hedging" effect with a decline in the maximum import share from any particular country, even if not Norway.

JEL Classification

F14, F51, P33, Q17, Q18

Version History

Original Release Date: November 25, 2020

Departments

Department of Economics, Iowa State University

File Format

application/pdf

Length

62 pages

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