Economic Power in International Trade

Abstract

Economic power is a country's capacity to harm another more than itself by withdrawing from a trading relationship. This paper develops a short-run model of trade disruptions to measure that power through counterfactual experiments. Sanctioned buyers and sellers relocate some of the barred flows onto alternate trade partners. Every producer, including those the sanction never touched, loses efficiency as inputs cease to arrive in their original proportions. The post-sanction equilibrium is the fixed point at which the reallocation of trade and the loss of efficiency generate self consistent production levels across all sectors of all countries in the world. Using a world input--output table of eighty economies and fifty industries, we solve for 9,480 such sanction equilibria, one for each unilateral and bilateral severance of a trading relationship. We compare the original equilibria with the sanction equilibria to compute the asymmetry in losses across bilateral country pairs due to the severance of trade between them. Our results show that mutual trade dependence is anything but mutual. The distribution of power in world trade is heavy-tailed. In the median trade relationship, one country inflicts on its trading partner four and a half times the loss it bears. Only 1 in 7 bilateral pairs has a semblance of having near equal power. The United States holds the favorable side against all seventy-nine of its partners and China against all but one. It is worth noting that power bears nearly no relation to the trade balance. Our measure of power among nation states also matches the historical record of economic coercion. The state that imposed the sanction holds the more powerful position in 170 of 185 episodes of the Global Sanctions Data Base.