70 Finance & economics The Economist May 28th 2022
Thetiesthatbind
O
n his whirlwindtour of Asia, concluded on May 24th, Presi
dent Joe Biden conducted himself with the awkward urgency
of a man trying to correct a costly error. China may be reeling, but
the ambivalent reaction, outside rich democracies, to America’s
late search for solidarity reveals how Washington’s global influ
ence has faded relative to Beijing’s. Mr Biden’s proposed IndoPa
cific Economic Framework, unveiled on May 23rd, seems an ac
knowledgment of why that is: for too long America had all but
abandoned efforts to forge new economic ties in the region.
Establishing a causal link between economic interdependence
and the balance of geopolitical power is no simple matter, how
ever. That economies often trade more with countries that share
similar political values and interests is clear enough. Yet it could
be the case that strategic concerns tend to drive economic rela
tionships, not the other way around, or that other shared fea
tures—such as income levels or culture—bring countries closer in
both economic and political terms.
Two recent papers help to pick apart what causes what. A first,
by Benny Kleinman, Ernest Liu and Stephen Redding of Princeton
University, considers whether economic interdependence fosters
greater political alignment. To answer the question, the authors
build a model in which countries sometimes take costly actions,
such as providing military aid to an ally, in order to boost growth
in countries with which they share political ideals and aims.
For those benevolent countries, the incentive to be generous is
partly rooted in the expectation that, as the economy of the allied
country grows, they will receive an economic dividend. Yet in the
world the authors depict, the reward is not fixed. If a country’s eco
nomic fortunes become less entangled with some places and
more with others, then the relative payoff from making costly po
litical investments in those places changes—and so, over time,
will patterns of political friendship and enmity. Economic inter
dependence, in other words, causes political rapprochement.
The authors reckon that China’s early liberalisation, by driving
a oneoff surge in the country’s economic engagement with the
world, provides evidence for this proposition. In assessing eco
nomic interdependence, they focus on one measure: how produc
tivity growth in one country affects real incomes in others. Economicheftalonedoes not ensure that other places’ fortunes are
bound up with your own. Instead, both rapid economic growth
and extensive involvement in global supply chains can amplify a
country’s economic influence on its trading partners.
Though initially modest, China’s global economic influence
had, by the late 2000s, overtaken America’s: the effect of Chinese
growth on the incomes of its trading partners was larger than that
of Uncle Sam (indeed, nearly double it by 2010). From 1980 to 2010,
the paper finds, the more economically enmeshed a country be
came with China, the more political alignment ensued, as cap
tured by patterns of unvoting, the forming of formal alliances and
similar metrics.
The authors find further support for their model by looking at
global trade shifts associated with collapsing airfreight costs. Be
cause shipping by sea must flow around continents whereas air
craft follow greatcircle routes, the falling cost of air freight in the
three decades to 2010 had uneven effects on bilateral trade flows
around the globe. This variation offers another way to test how
growth in economic interdependence leads to political align
ment—and the test, again, is conclusive.
This would seem to back oftaired concerns that China’s rise
has not just redrawn the geopolitical map, but also helped to erode
democracy worldwide. Yet here the news is encouraging. New
work by Giacomo Magistretti of the imfand Marco Tabellini of
Harvard University also exploits falling airtransport costs to tease
out the causal effect of trade on both attitudes towards democracy
and the overall political orientation of a country. They find that
stronger economic ties indeed facilitate the transmission of polit
ical values—but only if said values are democratic.
The effects are big. People who grew up during periods when
their home economy traded comparatively more with democra
cies appear to be much more drawn to open regimes than those
who came of age under opposite circumstances. The difference in
attitudes is equivalent to that between the support reported by
residents of Sweden (a bunch of hardcore democrats) and those of
China (who are more tentative). Prodemocracy populations, in
turn, translate into more open institutions. An 80% rise in trade
with democratic countries over a fiveyear period raises a coun
try’s Polity score (which measures how democratic a country’s go
verning institutions are on a scale from 10 to 10) by four points:
the difference, roughly, between Russia and Britain. Strikingly,
trade with autocracies seems to have no such effect. Excluding
America or China from the analysis does not alter the results.Bye America
Why should trade with democracies work this way? The data do
not permit firm conclusions. But evidence suggests the spur to de
mocratisation does not stem from faster economic growth or ris
ing levels of education. Neither does it result from increased mi
gration. Instead, the authors’ favourite theory assumes that trade
with democracies boosts a country’s “democratic capital”: it fos
ters an appreciation for the value of democracy which helps ce
ment a social consensus in support of democratic institutions.
That seems plausible, if perhaps a little vague.
Both trade and geopolitics will look different in the years ahead
than they did during the postwar era of American hegemony and
globalisation. But economic ties are likely to retain their capacity
to cultivate allies and shoreupsupport for democracy. If Mr Biden
wishes to bolster America’snational security, he might consider
giving freer trade a chance.nFree exchange
New research argues economic interdependence fosters alliances—and democracy