Political instability and international trade in the European Union: A network-based approach

In recent times, many countries have continued to deal with political instability due to difficulties in improving democratic practices and limiting episodes of violence and terrorism. Using a sample of 27 European Union (EU) countries observed yearly during the period 1999-2021, we empirically analyze how the domestic political instability of a given country can be affected by the degree of trade diversification adjusted for the political instability of the nonEU countries it trades with. We adopt a network-based approach and build a novel geopolitical dependency index. We find there is a risk of importing political instability along with international trade by increasing trade concentration or the import share from more politically unstable non-EU countries. Given the relevance of the United States and China for European economic activity, we also test our main hypothesis by adjusting the geopolitical dependency index. We see China’s prominent role in trade and political tension in EU countries compared to the US.