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Business as Usual: Economic Responses to Political Tensions

Business as Usual: Economic Responses to Political Tensions. Christina Davis and Sophie Meunier Princeton University. The Puzzle. Worsening political relations and Deepening economic ties. France-US tensions over Iraq. Sino-Japanese tensions over shrine. Theoretical Approaches.

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Business as Usual: Economic Responses to Political Tensions

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  1. Business as Usual:Economic Responses to Political Tensions Christina Davis and Sophie Meunier Princeton University

  2. The Puzzle Worsening political relations and Deepening economic ties France-US tensions over Iraq Sino-Japanese tensions over shrine

  3. Theoretical Approaches • Alliances, security, and trade • Security externalities encourage trade to follow the flag (e.g. Gowa and Mansfield) • Commercial peace • Economic interdependence encourages cooperative political relations (e.g. Oneal and Russett) • Linkages between political and economic relations • Empirical evidence mostly examines patterns of trade and war • Questions about endogeneity • Do causal mechanisms operate at lower threshold of conflict?

  4. Hypotheses • Politics first • Political tensions reduce economic interactions • Economics first • Risk of economic damage from political tensions mobilizes lobbying for improved relations • Separation of politics and economics • Political tensions have little effect on economic interactions as private actors respond only to economic information

  5. The Franco-American Relationship • Disagreement over Iraq war • Calls for boycotts on both sides • No downturn in trade or investment • McDonald’s posts best sales ever in France • No effects on American imports of French goods (except wine)

  6. Sino-Japanese Relationship • Political crisis over history issues and rivalry • Demonstrations and boycott calls • Suspension of high-level leader meetings • Trade and investment continues to grow • Toyota enjoys rapidly growing sales in China • Japanese firms plan to maintain or expand investment • “Cold Politics, Hot Economics”

  7. Explaining the Results • Politics first • Trade follows the flag • Intensity of tensions • Economics first • Lobbying and feedback loop • Politics and economics as separate spheres • Economic interdependence

  8. Substitutability Micro-Level Conditions Transnationality Regulatory and procurement decisions

  9. A Temporal Threshold • Duration of tensions and consumer boycotts • The “animosity model of foreign product purchase”: long-term impact of political tensions on brands and products (Klein et al.) • Durable, long term impact on brands

  10. International Economic Governance • Negative effect on cooperation • Spillover of political tensions on protectionism • Grandstanding • Cross-issue linkages • Positive effect on cooperation • Shelter from political tensions • Over-compensation • More economic liberalization

  11. Conclusion • Findings • Overall insulation between economics and politics • Firewall not impenetrable • Implications • Questions how governments direct economic flows under globalization • Shows linkage between politics and consumer behavior (for select markets and over long term) • Need further research to measure effects of political tensions - more common than wars

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