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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

Business as Usual:Economic Responses to Political Tensions

Christina Davis and Sophie Meunier

Princeton University

the puzzle
The Puzzle

Worsening political relations and Deepening economic ties

France-US tensions over Iraq

Sino-Japanese tensions over shrine

theoretical approaches
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?
hypotheses
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
the franco american relationship
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)
sino japanese relationship
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”
explaining the results
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
micro level conditions
SubstitutabilityMicro-Level Conditions

Transnationality

Regulatory and procurement decisions

a temporal threshold
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
international economic governance
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
conclusion
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