How Do Political Factors Influence International Trade and Investment?

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Political factors play a large role in determining the outcome of international trade and investment policies. While more economic integration and greater trade are generally considered beneficial for global stability, recent events may cause us to think differently. This paper tests the hypothesis that the degree of political polarization and a divided government are associated with expansions and contractions of trade and investment policies.

There has been debate about whether increased trade and investment promotes peace or increases the likelihood of conflict. Some scholars have argued that increased trade does increase the chances of conflict, while others have found that it decreases the likelihood of conflict. However, some researchers have concluded that increased trade may lead to greater political cleavages in a country.

The early models of trade policy focused on the politics of domestic groups and the “pressure group effect.” In other words, domestic groups seek protection and liberalization policies that increase their incomes. Adam Smith, however, recognized the distributional implications of trade policy. He also noted that the expansion of trade leads to collusion between businessmen.

There has also been debate about the relationship between political regimes and trade policy. For example, democratic countries are less likely to pursue protectionist policies. In contrast, autocratic countries are more likely to engage in protectionist trade policies. Some researchers believe that this is because democratic countries are more likely to cooperate and sign trade liberalization agreements than autocratic ones.

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