For better or worse, in sickness and in health: Australia-China political relations and trade

Abstract

ABSTRACT This paper quantifies the effects of shocks in bilateral political relations on Australia’s merchandise goods exports to China between 2001 and 2020. Using a vector autoregression framework, our estimates suggest that short-term fluctuations in political relations have no long-run effects on Australia’s aggregate export growth to China over this period, nor in any of three sub-periods analysed. A disaggregated analysis of 19 HS2 sectors reveals heterogenous short-run effects across sectors and time periods, with numerous sectors indicating the seemingly perverse finding that an increase in political cooperation/conflict is associated with a decrease/increase in export growth, with a lag of one to four months. We propose two hypotheses that are consistent with these findings, ‘doubling down’ and ‘dropping the ball’, contributing new understanding to the political relations-trade nexus in the context of a bilateral relationship that will likely be characterised by both cooperation and conflict in the decades ahead.