International Politics and Import Diversification

This paper examines how international politics affects trade in the absence of empires or wars. We first show that deterioration of relations between the United States and another country, measured by divergence in their United Nations General Assembly voting patterns, reduced U.S. imports from that country during 1962-2000. Though statistically significant, the magnitude of the effect of political distance on trade is small. Indeed, we show that except for petroleum and some chemical products, U.S. imports are not affected by international politics. American firms, however, diversify their oil imports significantly away from political opponents of the United States. Oil trade is often associated with backward vertical foreign direct investment that is subject to the expropriation risk. In contrast to the usual claim that oil is a strategic commodity, we provide suggestive evidence that trade in products when rents are appropriable is more likely to be affected by international politics.