Political instability abroad affects US exports

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Lost in all the headlines about America’s trade deficit is the fact that the US currently exports more than ever before. US exports have more than doubled since 2000, surpassing $2.5 trillion in 2018.

So, while most of the attention is focused on how much America imports, we should be equally concerned about what affects our exporters. One influence is political instability around the world.

In the last few months, we’ve seen contests for power in Venezuela and Sudan as well as the continuation of violence in countries like Syria. Firms hoping to export goods to foreign markets are sensitive to this kind of political risk.

Uncertainty over a regime’s stability means uncertainty over the business climate. Trade barriers, regulations, and even the right to do business may all change as governments face pressure from domestic opposition (or get replaced by that opposition).

Where political battles turn violent, the problems for international firms may be far worse. Civil war can destroy productive infrastructure and, of course, destroy human capital.

Unsurprisingly, civil war onset is a strong determinant of where US firms export.

 
 

In the first year of civil war, total US exports to war-afflicted countries fall an average of 25 percent. And over 5 years, they can fall as much as 55 percent.

In the months prior to civil war onset, average US exports are about $200 million. In the months after, that average drops to $128 million.

Of course, the US doesn’t trade that much with the countries who most often fall into domestic political violence. But civil war still deters several billions dollars of total US trade across multiple conflicts. And this doesn’t include the trade deterred by peaceful unrest.

There’s more to the story as well. We shouldn’t just be concerned with export levels. Volatility in global markets also matters. As firms adjust to political conditions abroad, there will be visible shocks in bilateral trade flows.

 
 

This volatility declines once the market adjusts and trade relations reach a new normal of lower, but steady trade. However, the 6-month average standard deviation of exports is 20 percent higher in the immediate aftermath of civil war onset.

That means war exposes US firms to greater risk.

Therefore, if we are concerned about America’s business opportunities abroad, we need to pay closer attention to political conditions in partner markets. Political instability is, essentially, a trade barrier. Like tariffs, political instability diverts trade away from uncertain markets. This hurts the economy mired in conflict, and it hurts US exporters.

None of this diminishes the impacts of war for societies directly affected. Rather, we need to add global trade disruption to civil war’s many, many costs.