The Economics of Nationalism and Trade

1. The Economics of Nationalism and Trade Xiaohuan Lan (CKGSB) Ben Li (Boston College) 2012.11.05

2. 1998 NATO’s Bombing of Chinese Embassy in Belgrade

3. 2008 Olympics Torch Relay in Paris

4. 2012 Diaoyu Island

5. An economic theory of nationalism (I) • Forming a nation: • Benefits: lower costs of domestic trade, larger domestic market • Cost: living with people with different cultures or races. • Equilibrium: optimal size of a nation Alesina, Spolaore, and Wacziarg (2000)

6. An economic theory of nationalism (II) • Uneven globalization shocks in regions within a nation • The shocked regions rely less on the domestic market • Disagreement with the current country size as optimal (prefer a smaller country) • Less nationalistic

7. Empirical Evidence • A one standard deviation increase in the economic openness reduces nationalism by 0.2 standard deviation • Across 200 cities in China in 2009: the unique data of Chinese Political Compass (CPoC) • Before and after the membership of WTO, across 20 provinces in China from 2001 to 2007: the World Value Survey • Across 15 countries from 2001 to 2007: the World Value Survey Channels: not through protectionism, pride of national culture, or other related political ideologies

8. Literature: non-economic consequences of international trade • Wars: Martin, Mayer and Thoenig (2008, 2012); Skaperdas and Syropoulos (2001) • Military spending: Acemoglu and Yared (2010) • Institutional quality: Acemoglu, Johnson, Robinson (2005) • Slavery trade and mistrust in Africa: Nunn and Wantchekon (2011) • Of course, a large literature on protectionism

9. Literature: nationalism affects economic behavior • Boycott of French wines in the U.S. in 2003, no effect on sales: Ashenfelter, Ciccarella, and Shatz (2007) • Boycott of France in the U.S. reduced bilateral trade: Michaels and Zhi (2010) • Boycott of French cars in China in 2008: sales fell. Hong et.al. (2011) • Adverse shocks of Sino-Japan relations on the bilateral trade in 2005 and 2010: Fisman, Hamao, and Wang (2012)

10. A large literature of nationalism in other social sciences • Lots of case studies, general weak empirical evidence • A model from the perspective of economics • empirical tests • Our focus on the within-country analysis: history, ethnicity, geopolitics, and trade policy are constant. • Separate different channels

11. The Model (I) • Nsymmetric regions, each of which (i) uses a local specific factor K(i) to produce a tradable good X(i). • Each region also makes and consumes a non-tradable aggregate good: • Within-border trade is costless. Cross-border trade incurs an iceberg cost • Utility function: consumption increases with the size of country S(i)

12. The Model (II) • Optimal country size • Nationalism in Home is the endorsement of the S* as the best size of the domestic market. • Congruent with nationalism defined in social sciences

13. Handler (1988) on nationalism “Nationalism is an ideology about individuated being. It is an ideology concerned with boundedness, continuity, and homogeneity encompassing diversity [...] [O]urnotions of “nation” and “state” imply similar senses of boundedness, continuity, and homogeneity encompassing diversity. The state is viewed as a rational, instrumental, power-concentrating organization. The nation is imagined to represent less calculating, more sentimental aspects of collective reality. Yet both are, in principle, integrated: well-organized and precisely delimited social organisms. And, in principle, the two coincide.”

14. The Model (III) • A globalization shock hits some regions in each country: • the optimal size of the country for the these regions is now: • Two effects: a growth effect and a “relative-importance” effect • Conditional on income, globalization-hit regions have weaker nationalism because it no longer endorses the same domestic market as other regions • Through the economic openness: imports+exports

15. Illustration 1 Home Foreign (Country formation) Home Foreign (Globalization)

16. Illustration 3 Home (Globalization weakens nationalism)

17. Chinese Political Compass • the prototype: the UK website Political Compass • test questions: customized to the Chinese socio-economic context. • appraise 50 statements on a four-point scale. Responses mapped using an algorithm to generate a test report. • authoritarianism vs. libertarianism (politically) • conservatism vs. liberalism (culturally) • collectivism vs. neoliberalism (economically) • Strictly anonymous; IP addresses are identified; year 2009; mainland only.

18. The CPoC Self-Evaluation (I)

19. The CPoC Self-Evaluation (II): [-2, 2] from left to right

20. The CPoC Self-Evaluation (III): Compare yourself with other people Economy Political regime Culture

21. Representativeness of the CPoC sample • Representative of the Chinese population? No. • Representative of the Chinese internet users? • 29% of the whole population in 2010 • Younger, richer, more educated, more urban residents • Current or future Chinese middle class • Altogether, more than 300,000 participants in CPoC • In our 2009 sample, 54,602 participants with a mainland IP address, across 303 cities/prefectures (out of 333 cities) • Various checks on the sample selection

22. Measure Nationalism • [N1] assertion of the national unity (Gellner 1999) National unity and territorial integrity are the interests of paramount priority for a society. (国家的统一和领土完整是社会的最高利益) • [N2] protecting national interests from other countries (Hobsbawm,1990) Given sufficient comprehensive national power, China has the right to take any measure to protect its interests. (如果国家综合实力许可，那么中国有权为了维护自己的利益而采取任何行动) • [N3] militarism (Posen, 1993) All students, regardless of whether they are in college, high school, or elementary school, should attend the military training arranged by the government.(无论中小学生或大学生，都应参加由国家统一安排的军训) • [N4] anti-foreign sentiments (Gries, 2005) Western countries, headed by the United States, will not really allow China to become a world-class powerful nation.(以美国为首的西方国家不可能真正容许中国崛起成为一流强国。)

23. The Index of Nationalism: simple average of the four Correlation matrix Principle Component Analysis

24. The Distribution of Chinese Nationalism(Mean=2.907, Standard Deviation=0.123)

28. OLS Results:aone standard deviation increase in the economic openness reduces nationalism by 0.2 standard deviation(number of obs=200) Other controls: GDP per capita, College education, Rural population, Gov’t budget in GDP

29. On Political Propaganda “Official ideologies of states and movements are not guides to what it is in the minds of even the most loyal citizens or supporters.” Eric Hobsbawm (1992)

30. Nationalism and Protectionism Measure Protectionism: • [P1] High tariffs should be imposed on foreign counterparts of domestic products, in order to protect national industries (应当对国外同类产品征收高额关税来保护国内民族工业) • [P2] Foreign capital in China should be restricted from developing at (their) will.(在华外国资本应该受到限制，不能任意发展) • Regress the index of nationalism on P1 and P2, then take residuals

31. Instrumental Variable • Each city sellsand buys different products from different trade partners • The prediction power of the gravity equation on trade volumes • IV: distance-weighted GDP of trade partners • Data: product-destination-city-year trade data from the China Customs Statistical Information Service • Exogeneity: the GDP of foreign countries is beyond the control of a certain city; constant trade policies across China • Concern: nationalism drives the selection of trade partners? (various robustness check: without the US, Japan, the EU, OECD countries, War8 countries, NATO countries etc.)

32. 2SLS Results: a one standard deviation increase in the economic openness reduces nationalism by 0.27 standard deviation(number of obs=200)

33. Cultural Origin of Nationalism: Smith (1999), Anderson (2001) Measure attitudes towards Chinese traditional culture • [Chinese Medicine] Traditional Chinese medicine exceeds modern mainstream medicine in a number of ways. (中国传统医学具有一些现代主流医学不能比拟的优势) • [Zhou-yi] Zhou-yi and Ba-gua are great achievements of our forefathers and can explain a wide range of phenomena. (周易八卦是老祖宗智慧的结晶，能够有效的解释很多事情) • [Confucianism] Modern China needs Confucianism. (现代中国社会需要儒家思想)

34. The channel is not culture Not through channels of other related political ideologies either: collectivism, populism, conservatism etc. Other concerns: driven by extreme opinions…

35. Analysis within China, over time • Control for regional fixed effects • The natural experiment of becoming a member of the WTO before and after 2001 • Data: World Value Survey in China (WVS) in 2001 and 2007 • Advantages: the independent data source; widely used; individual-level demographic variables • Disadvantages: small number of observations (2, 038); province-level analysis

36. The Difference-in-difference Strategy • Unbalanced effects of the WTO membership • High (trade) exposure regions: • the Yangtze River Delta and the Pearl River Delta • two trade centers: Shanghai and Hongkong • 4 provinces located in the two deltas: Shanghai, Zhejiang, Jiangsu, Guangdong • Low (trade) exposure regions: other 16 provinces

37. Unbalanced Effect of the WTO on the Trade Volume

38. Unbalanced Change in Nationalism

39. DID Estimates(individual demographics: gender, age, marital status, education, income)

40. Fixed-Effects estimates:a one standard deviation increase in the economic openness reduces nationalism by 0.21 standard deviation

41. Cross-Country Analysis • The rationale applies to cross-country analysis • Must control for country fixed effects • infer causality? trade policy could be endogenous • WVS 2001 and 2007, 15 countries • Data of GDP and trade: the Penn World Table (v 7.0)

42. Levels of Nationalism in 2007

43. Change in nationalism v.s. change in openness 2001 to 2007

44. Turkey and Argentina Turkey • Full membership negotiation with the EU started in 2004, accompanied by the high uncertainty in Turkey of being finally accepted by the EU. • A sense of double-standards skepticism and mistrust significantly strengthened the country's nationalism (Keyman and Yilmaz, 2006) Argentina • economic collapse in 2001, default on external debts in 2002 seriously damaged its national pride. • “for a while it was as though Argentina had no possible future and was doomed to descend into poverty and shame” (Domingues, 2006).

45. Country Fixed Effects Estimates: a one standard deviation increase in the economic openness reduces nationalism by 0.25 standard deviation

46. Concluding Remarks (On Scottish independence) ... just 21% of Scots would favour independence if it would leave them £500 ($795) a year worse off, and only 24% would vote to stay in the union even if they would be less well off sticking with Britain. Almost everyone else would vote for independence if it brought in roughly enough money to buy a new iPad, and against it if not. The Economist, April 14th, 2012