A Neighbor is Better than a Brother Far Off?:
Evidence from Trade Statistics
Sho HANEDA (Nihon University)
JSIE seminar @ Nihon University
20/07/20241

Outline
1.
2.
3.
4.
5.
6.

Introduction
Data overview
Econometric specification
Results
Discussion
Conclusion

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A good neighbor is better thana brother far off
We are sorry, but
It is too far to help you

brothers

I’m coming, wait a second!

neighbor31. Introduction
1.1 Background• Given the US-China trade war, the spread of COVID-19, and the RussiaUkraine war, the Trans-Pacific region has faced issues regarding thereorganization of Global Value Chains (GVCs).
→ Changes in each country’s trade and FDI patterns• The consequences of these events have revitalized political arguments
regarding the reconstruction of GVCs.
→ Each country tend to emphasize economic security regarding trade policy4

1.2 Offshoring and GVCs
Offshoring

Source:Gary et al. (2016) “Promoting Decent Work in Global Supply Chains in Latin America and the Caribbean”

51.2 Offshoring and GVCs
GVCs

Source:
The government of Canada. (2010) “Linking In to Global Value Chains”

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1.3 Review• Political risks and FDI(Aiyar et al. 2024, Ahn et al. 2023, Desbordes 2010)• Political risks and international trade(Hardwick and Armstrong 2022, Cosar and Thomas 2021,
Gupta et al. 2019)• Geopolitical distance(Bosone et al. 2024, Cevik 2023, Nana and Ouedraogo 2023)
Ø Detailed product-level analysis have not been conducted,
despite the fact that offshoring and friend-shoring tend to occur
in the trade of intermediate products7

1.4 Purpose
This study aims to …
1. quantify the degree of friend-shoring2. conduct an empirical analysis of the impactof geopolitical proximity on the level of trade
and trade growth, with due consideration ofproduct characteristics
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2. Data overview
2.1 Trade statistics
Data source: UN, Comtrade
Classification: HS 2017 version, 6-digit product(HS 84-92 sectors)
Target country:

Ø Reporters: 180 countriesØ Partners : 187 countries

Target period: 2019-2023
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2.2 Geopolitical distance• Bailey et al. (2017) developed a variable that expresses
the position of each country on the agendas of the UnitedNations.
• They calculated each country’s ideal point using theUnited Nations General Assembly Voting Data.
• Geopolitical distance is calculated as the absolute value ofthe difference between the ideal points of the countrypair.
Ø The higher the value, the greater the geopolitical distance.
102.2 Geopolitical distance (cont.)

Reporter's ideal point Partner's ideal point

Difference (absolute value)

Geopolitics

Case 1

1.5

1.5

0

Close

Case 21-1

2Intermediate

Case 32-2

4Distant

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-4
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Figure 1: Changes in geopolitical distance (1946-2022)

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3

2

1

0

-1

-2

-3

World
United States
Japan
China
United Kingdom
Germany
RussiaIndia

Source: Created by the author using values collected from Bailey et al. (2017) .
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0
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Figure 2: Changes in geopolitical distance among USA, Russia,and China(1970-2022)

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54

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1

US-Russia
US-China
Russia-China

Source: Created by the author using values collected from Bailey et al. (2017) .
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3. Econometric specification
3.1 Gravity model of international trade• The gravity model of trade is an economic model of
Newton's law of universal gravitation used to analyze thedeterminants of trade transactions between two countries.
• The value and amount of trade are defined as the forces of
attraction between two substances, which are determinedby the physical distance between the two countries and theeconomic size of the two countries.
• As distance increases, the value and amount of tradedecrease, which impedes trade or increases trade costs.
Ø By taking advantage of this and incorporating variables ofgeopolitical proximity into trade costs, hypotheses can beformulated for empirical analysis.
143.2 Estimation model
Baseline model!"#$%&'()*+,= ./ !"012(,3/ + .5 !"012),3/ + .6 !"1789%":'()+ .; <=>>="_!%"@() + .A <=>>="_:=!() + .B C#D(),3/+ .B 0'=E=!797:8(),3/+F( + F) + F+ + F, + G()*+,i, j, k, l, t: reporter, partner, trade flow (total, exports, and imports), product,and yearØ Estimated by the Poisson pseudo-maximum likelihood (PPML) estimator15

3.2 Estimation model (cont.)
Difference model!"#$%&'()*+, − !"#$%&'()*+,./= 1/ !"234(,./ + 16 !"234),./ + 17 !"389:%";'()+ 1< =>??>"_!%"A() + 1B =>??>"_;>!() + 1C D#E(),./+ 1C 2'>F>!8:8;9(),./+G( + G) + G+ + G, + H()*+,i, j, k, l, t: reporter, partner, trade flow (total, exports, and imports), product,and yearØ Estimated by the OLS
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Kaplan-Meier survival estimates〇：Trade×：No trade△：Censoring because of the revision of trade classification (6-digit)□：New trade because of the revision of trade classification (6-digit )17

Table 1. Definition and source of variables

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Table 2. Descriptive statistics

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4. Results
4.1 PPML estimation
Table 3. Results of the PPML estimator for manufacturing products

Note: Robust standard errors are indicated in parentheses. **, * and + indicate that the results are statistically significant at 1%, 5%, and 10%, respectively.
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Table 4. Results of the PPML estimator for manufacturing products(trade in t-1=0)

Note: Robust standard errors are indicated in parentheses. **, * and + indicate that the results are statistically significant at 1%, 5%, and 10%, respectively.
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4.2 Difference approach
Table 5: Results of the difference approach for all products

Note: Robust standard errors are indicated in parentheses. **, * and + indicate that the results are statistically significant at 1%, 5%, and 10%, respectively.

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4.3 Kaplan-Meier survival estimates
Figure 3: Results of the duration of export by geopolitical distancecategory (2012-2023)

Note: ”cvote=0,” " cvote=1” and " cvote=2" stand for the first, second, and third tertiles, respectively, in terms of the geopolitical variable.
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Figure 4: Results of the duration of import by geopolitical distancecategory (2012-2023)

Note: ”cvote=0,” " cvote=1” and " cvote=2" stand for the first, second, and third tertiles, respectively, in terms of the geopolitical variable.
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Figure 5: Results of the duration of export by geopolitical distancecategory (single partner product, 2012-2023)

Note: ”cvote=0,” " cvote=1” and " cvote=2" stand for the first, second, and third tertiles, respectively, in terms of the geopolitical variable.
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Figure 6: Results of the duration of import by geopolitical distancecategory (single partner product, 2012-2023)

Note: ”cvote=0,” " cvote=1” and " cvote=2" stand for the first, second, and third tertiles, respectively, in terms of the geopolitical variable.
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5. Discussion• The level analysis using the PPML estimator determined that geopoliticaldistance positively impact trade, except for final consumption products.
• Physical distance negatively affects trade in manufacturing sectors.
Ø Countries still depend on geopolitically distant partners for theorganization of GVCs and trade in manufacturing sectors.
• However, geopolitical distance might have a negative impact on newly
started trade.
• Also, using the difference approach, geopolitical distance was shown tonegatively impact the changes in existing trade.
Ø Countries may have started to friend-shore with geopolitically close
partners because geopolitical proximity has a positive impact onchanges in trade value.

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5. Discussion (cont.)• The results of Kaplan-Meier survival estimates show that geopoliticaldistance may negatively affects the duration of trade.
• This applies to both export and import.
• However, geopolitical distance has a positive impact on the duration of
single-partner export and import.
Ø There may be the possibility that some countries cannot stop tradewith geopolitically distant partners because there are no other tradepartners.

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Policy implications• The governments of each country must consider the gradualincrease in friend-shoring when determining trade policies.
• However, organizing GVCs with the concept of comparativeadvantage, based on economic efficiency and free trade is still
the source of growth.
• Thus, the policy makers require thinking strategically regarding
the balance between geopolitical and economic aspects.

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6. Conclusion• Geopolitical distance might positively impact trade value in
manufacturing sectors, but it has a negative impact on trade in finalproducts.
• The closer the two countries are geopolitically, the more their exports
and imports may grow.
• Geopolitical distance has a negative impact on the duration of trade
while it has a positive impact on that of single-partner trade.
• Overall, geopolitical proximity had a positive impact on the growth andduration of trad.
Ø the balance between geopolitical and economic aspects.
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Future works• Target sector and products• Geopolitical proximity index• Endogeneity• Dis-extensive margin of trade31References•••••••••••••••••••••••Aiyar, S., Malacrinom, D. and Presbitero, A. (2024) “Investing in Friends: The Role of Geopolitical Alignment in FDI Flows,” European Journal of PoliticalEconomy, 102508.
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