Working Paper BETA #2023-24

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Title : Political Relations and Trade: New Evidence from Australia, China and the United States

Author(s) : Yifei Cai, Jamel Saadaoui, Yanrui Wu

Abstract : This paper employs structural vector autoregression and local projection methods to examine the impacts of the deterioration in US-China political relations on bilateral trade between Australia and China. Three scenarios are considered to reflect the evolution of US geopolitical strategies in recent years such as “America First”, “China Threat Theory” and “The Protection of US Allies”. The simulation results illustrate that worsening US-China political relations has a negative impact on Australian exports to and imports from China. It is also found that economic conditions in the US play a more important role in the transmission of this impact than those in China and Australia. In addition, various options are explored to check the robustness of the findings in this paper.

Key-words : Structural vector autoregression, Local projection, Impulse response; USChina political relations; Australia-China trade

JEL Classification : C32, F14, F51