The Trade Impact of the Creation/Disbandment of Diplomatic Relations: The Case Involving Mainland China and Chinese Taiwan

The Trade Impact of the Creation/Disbandment of Diplomatic Relations: The Case Involving Mainland China and Chinese Taiwan

Summary

This paper studies how the establishment and the disbandment of formal diplomatic ties affect bilateral trade, using the case of countries that switched recognition from Chinese Taiwan to Mainland China between 1995 and 2019. Employing a staggered difference-in-differences design inside a structural gravity framework (PPML estimator) and event-study methods, the author examines contemporaneous and dynamic effects on exports and imports.

Key empirical findings: switching countries see a large fall in their exports to Mainland China (about 56%) and a rise in imports from Mainland China (about 25%, roughly US$34m per country per year). For Chinese Taiwan, imports into switching countries fall sharply (around 39%, ~US$9m per country per year) while exports from switchers to Chinese Taiwan are largely unchanged. Effects take time to materialise: Mainland China effects become significant after ~2–3 years, Taiwan import declines appear sooner.

Author’s take

Punchy summary: this isn’t just diplomacy for show — choosing Beijing over Taipei tends to flood switchers with Chinese imports while their own exporters struggle to grow into China. The study is rigorous (gravity + PPML + event studies + robustness checks) and flags important distributional consequences for developing countries, especially those whose industry mix looks like China’s.

Key Points

• Method: staggered DiD within a structural gravity (PPML) framework, event studies corrected for staggered adoption, and robustness checks (lags, PSM, alternative data).
• Main result: after switching to Mainland China, exports from switchers to China fall by ~56%; imports from China rise by ~25% (≈US$34m per country per year).
• Trade with Chinese Taiwan: imports into switching countries drop ~39% (≈US$9m/yr); exports to Taiwan remain statistically unchanged.
• Timing: shifts to Mainland China’s trade effects take ~2–3 years to show; reductions in imports from Chinese Taiwan occur faster (≈1 year).
• Mechanisms: economic diplomacy, embassy presence and resourcing, and a crowding-out effect from cheap Chinese imports that undercut local producers and exports.
• Heterogeneity: countries whose industry structure closely matches China suffer larger export declines; Sub‑Saharan African and landlocked switchers sometimes see increased exports to China and greater dependence on Chinese trade.
• Robustness: results persist across Comtrade and IMF DOTS, product-level data, lagged specifications and event-study plots; PSM narrows some effects but core asymmetry remains.

Context and relevance

Why this matters: diplomatic recognition choices are often framed as political, but they carry measurable economic consequences. For many developing countries, switching to Mainland China has meant easier access to affordable Chinese goods but not necessarily expanded export opportunities — and sometimes a squeeze on local production and export growth. The findings matter for trade policy, industrial strategy and for countries weighing the trade-offs of foreign-policy realignments with major trading powers.

Why should I read this?

Quick and blunt: read it if you want to understand how a bit of foreign‑policy paperwork can reshape trade flows in ways you might not expect. It shows switching to Beijing often brings cheap imports rather than export wins for the switcher — so if you care about industrial policy, trade dependence or the economic side of diplomacy, this paper gives you the hard numbers and the timing to think about.

Source

Source: https://onlinelibrary.wiley.com/doi/10.1111/roie.12809?af=R