How Superpowers Shape Trade

Alberto Martín interviewed by Tim Phillips

Alberto Martín: 
I gain more if I align with a country that’s large than with a country that’s small. 

Tim Phillips:
Welcome to another VoxTalks, recorded at the Paris School of Economics, CEPR Policy Forum. I’m Tim Phillips. Well, we’re thinking a lot about how tariffs affect trade at the moment, but the influence of superpowers also has an effect. When there’s a dominant global power does that encourage other countries to march in step and trade together? And what happens when that system breaks down? Alberto Martín, of the Barcelona School of Economics and CEPR, is one of a team of researchers who’ve been tracking the influence of hegemons, large dominant economies, on trade from the beginning of the 19th century onwards. Alberto, welcome to Vox Talk’s Economics. 

Alberto Martín: 
Hey Tim.

Tim Phillips:
So, I defined a hegemon quite loosely. What do we mean by a hegemon? 

Alberto Martín: 
Well, it’s a bit of a fussy concept because we tend to think of a hegemon as a strong country, it could be militarily, economically. Here, we just take a definition from political science. Basically, we think of it as a large country with the ability to influence others. 

Tim Phillips:
Who have the hegemons been in the last 200 years?

Alberto Martín: 
We use data from political science for that. We use something called the Global Power Index that measures the share of world power that’s exercised by each country. And there’s different definitions of hegemons depending on this power index, but basically, it’s the usual suspects, Tim. So, 19th century, we had the UK. The 20th century, we had the US almost throughout. At times, you have the USSR and Germany, and most recently China. 

Tim Phillips:
And, in general, what sort of influence does a hegemon have over other countries policies? 

Alberto Martín: 
Well, you could influence in different ways. One thing that we look at in the paper, and that seems to be the case, is you can have influence just due to your sheer size. Countries may want to emulate you and align with you, march in step with you. Or, you could have influence because you have coercive power. So, that’s something economists are looking at a lot today, and that’s something we also explore in the paper. Naturally, if you’re a large country, I can exercise power over you, to adapt your policies to my liking.

Intermission: 
Don’t miss our other episodes from the Paris School of Economics on this topic, especially our conversation with Isabelle Mejean last week on whether the desire to use trade to enhance our security is actually making the world a more dangerous place. Listen to ‘The Safety Paradox’, wherever you get your podcasts.

Tim Phillips:
So, your theory tests how much alignment influences trade. What do we mean by alignment here? 

Alberto Martín: 
Loosely speaking, what we mean by alignment is when a country adopts policies that are similar to your own. So, we could think of a country being a democracy, just like the superpower, or having similar regulatory standards as the superpower. It’s a tricky thing, how to measure that in the data, exactly. So, what we do in the paper is we look at treaties. We say that two countries are aligned if they sign a lot of treaties with each other. So, we construct what we call the global treaties database, which is a database that records all international treaties signed since the year 1800.

Tim Phillips:
Wow. 

Alberto Martín: 
It has about 77,000 treaties, I think, which are mostly bilateral. So, this is between any two countries, but also multilateral treaties, like a UN treaty, would be there as well. 

Tim Phillips:
And these are not necessarily trade agreements, they’re any kind of treaty, are they? 

Alberto Martín: 
No. So that’s very important. So, these treaties, we break them down into something like 26 categories. Some of them are economic — including things like trade, or investment agreements, et cetera — but others are not economic in nature. They could be about culture, about settling borders. So, many types of things. 

Tim Phillips:
And where do you find the data for 200 years of treaties? 

Alberto Martín: 
Well, part of it comes from digital records. So, if you go to the UN website, countries are supposed to report their treaties to the UN. So, the UN has a large database. For the early 20th century, we go to the League of Nations database at a similar database. Then we also use historical archives for the 19th century. And then we also use country specific sources for the larger countries. So, it comes from a wide array of sources. We put them all together and all treaties, or most treaties, we hope are included. 

Tim Phillips:
And can you test whether treaties are a good proxy for this concept of alignment? 

Alberto Martín: 
We can, but it has its problems because if we had another great measure of alignment, we would just use that. But let me tell you, the most commonly used measure of alignment is UN voting in the literature so, whether countries vote together or not. Now our measure correlates quite well with UN voting for some historical periods and less well for others. That partly reflects that UN voting may not be such a good measure of what we’re after. Many UN votes are on very narrow issues, like the Israel-Palestine conflict. So, even countries that you would not consider to be friends, like India and Pakistan, they may vote very similarly on these issues. So, the bottom line is it’s correlated with UN voting at times. One advantage our measure has, we think, is that it covers a wide array of areas, as we were just discussing. And also, we can go back 200 years, which of course, UN voting does not. 

Tim Phillips:
So, what’s your intuition here? Why would alignment make it easier to trade? 

Alberto Martín: 
I think it’s very natural why you could think some dimensions of alignment make it easier to trade. Think of firms, or citizens, conducting cross-border transactions, importing, exporting, or maybe just going there to see the business environment if I want to invest in another country. Well, the fact that the regulations — the type of rule of law, whether we are democracies or autocracies — all of that can influence, may make it more natural for us to conduct cross-border transactions. And in fact, there is evidence in trade, that we mentioned in the study, it’s not ours, that democracies tend to trade more with each other. Countries with similar types of standards, trade more with each other, et cetera.

Tim Phillips:
And when there’s a hegemon, then it influences where that alignment goes. There is more of a return if you are aligned with a very powerful country. 

Alberto Martín: 
Exactly. So, the idea is very simple that we have in mind, is, look, if indeed we, by the notion that, when I adopt policies that are more similar to yours, we have larger gains from interaction. Well, it follows almost immediately that I gain more if I align with a country that’s large than with a country that’s small. 

Tim Phillips:
So, in your database, is it showing that Hegemons sign more treaties? 

Alberto Martín: 
Let me recap a little bit. What we want to argue is that hegemons are drivers of alignment. They foster alignment. And number two, that this alignment is conducive to more trade. So, going to your question, the first point, the way we show it is, we try to see whether countries that are hegemons, according to different definitions — one could be this global power index that I measured earlier — whether they sign a disproportionate share of treaties in the world. What do I mean by disproportionate? Well, we control for their population, their economic size, because of course large countries you would expect maybe to sign more treaties. But we find that these countries with hegemonic status, measured in different ways, sign a disproportionate share of treaties. And we interpret that as saying they’re kind of fostering alignment.

Tim Phillips:
And after they have signed these treaties and aligned, you see that they end up trading more? 

Alberto Martín: 
Let me be a bit careful here. What we show is that alignment goes hand in hand with more trade. 

Tim Phillips:
Right, we’re not saying alignment is causing the trade. 

Alberto Martín: 
Exactly. So, there’s a bit of a difficult question to establish empirically, but let me just recap, that even in the theory, it’s not obvious what causes what, because it’s true that alignment leads to more trade. But the reason for which I align with you in the first place is because I expect to get gains from trade. So, it’s trade that leads to alignment, which in turn leads to that trade. So, when we go to data, we do two things. Number one, we establish — as you were just mentioning — that, on average, countries that align more with each other, as measured through their treaty signing, tend to trade more with each other. So, we run regressions that people run in this literature showing, well, controlling for everything else that people have already shown, leads to higher trade. The more aligned you are with another country, the more you will trade with that country. And interestingly, we find that, for a treaty measure of alignment — but even if you take out economic treaties, you may think, well, it’s all driven by things like trade treaties, and so on — the results still hold. And even if you control for bilateral trade tariffs between the two countries, the result holds. So, the bottom line is that yes, we find that alignment treaty signing is correlated with higher trade. 

Tim Phillips:
And this holds when there’s one hegemon, or more hegemons? Can there be multiple hegemons in the world?

Alberto Martín: 
There can. We are not directly testing how the presence of different hegemons affects this result, but when we run our regressions, basically we’re not emphasising the fact that there is one, or more than one, hegemon. We’re just asking ourselves is it true, that if a country is a hegemon, [it] signs a disproportionate share of treaties. We do this for the 200 years. So, at many times there could be more than one hegemon, and the result is derived from that. Although, we do not claim causality, we do try to show somewhat is it that trade comes before treaties or treaties can before trade? And what we find in the data is that it’s mostly treaties coming before trade. So, that’s not strictly a causal statement, but for what it’s worth it’s treaties that proceed trade. It appears to be in the data.

Tim Phillips:
Okay, so we’re thinking a great deal about power and how power is used in the world at the moment to either create or to block trade. What’s the recent trend in treaty signing? 

Alberto Martín: 
This is quite interesting. In the last 15 years, treaty signing has declined significantly. And we don’t have a very good explanation for that because let me tell you, Tim, if we go back to 1800 and we look at the trend in treaty signing, basically treaties have going up, up, up. And of course, many things have been changing in the world, you know, the numbers of countries, et cetera. But we see three large drops. One is World War I, one is World War II, and the third one is this drop in the last 15 years. So, initially, we thought that this could be a reporting lag because if countries take time to make their treaties public, and so on, maybe towards the end of the sample, we’re not picking that up. But we’ve tried to overcome that by going to the sources of some big countries, the US, the UK, where we can go and see the treaties that these countries are signing, and it does not seem to be a reporting issue. So, treaty signing does appear to be falling.

Tim Phillips:
And so that means by this measure than our multipolar world that we’re seeing at the moment is becoming less aligned. 

Alberto Martín: 
Honestly, it’s hard to say exactly what that means. One thing that we do find is that if you look in the last 20 years at who are the large countries that the world is signing treaties with, after the fall of the Berlin Wall, it was clearly the US. And if you look at the decade of 2010, 2020 it was predominantly, China. Now that per se does not mean much because maybe you could think, well, we already signed all the treaties we had to sign with the US and now China joins the world economy, now, we need to sign treaties with China. So, it need not necessarily signal a large realignment. But the bottom line to your question is, we really don’t know the effect of this falling treaty signing. We should look further into it. 

Tim Phillips:
And what would your theory, what would your modelling, predict if this decline in treaty signing, if this decline in alignment, is a long-term trend, and it is real. 

Alberto Martín: 
Well once again, for us, what’s important is the volume of treaty signing. But it’s also important who is signing treaties with whom.

Tim Phillips:
Yes.

Alberto Martín: 
So, to give you a full answer, we would have to explore better this pattern to see is it an overall decline in treaty signing? Or is it that treaty signing is disappearing between some countries and strengthening among others, et cetera. And each of these configurations in the data could have very different implications if you view them through the theory.

Tim Phillips:
I see. So, we might have a return to globalisation if the right people are signing the right treaties. We might indeed break down into different blocks. We might have a bit more of a mess.

Alberto Martín: 
We could.

Tim Phillips:
So, if trade does follow alignment, rather than just trade agreements and deals, do you think maybe we might be putting too much faith, expecting too much, from this constant attention we have at the moment on trade deals?

Alberto Martín: 
Well, not necessarily. These trade deals of course, are terribly important. Some of these trade deals are indeed agreements in our database. And of course, you could think that of all the agreements, you know, which ones matter most for trade probably are the trade ones. Okay. So, we are not saying that. What we try to highlight is that alignment, that goes over and beyond just trade policy, matters for bilateral interactions between countries, even trade interactions. And so, of course, I would by no means want to claim that these trade deals are not important.

Tim Phillips:
Alberto, it’s fascinating work and I look forward to what comes out of this. Thank you for talking about it today. 

Alberto Martín: 
Thank you very much, Tim. Thank you for having me.

Tim Phillips:
The paper is called Hegemonic, or Hegemonic, Globalization. And the authors, Fernando Broner, Alberto Martín, Josefin Meyer, and Christoph Trebesch.

Outro: VoxTalks economics is a Talk Normal production. The assistant producer is Megan Bieber, and our editor is Andrei Zargarian. Next time on Vox Talks economics, why confusion about tariffs may actually be worse for trade than the tariffs themselves.