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Does political risk lower bilateral trade flow? A gravity panel framework for Thailand vis-à-vis her trading partners

Gour Gobinda Goswami (Economics, North South University, Dhaka, Bangladesh)
Nisit Panthamit (Faculty of Economics, Chiang Mai University, Chiang Mai, Thailand)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 3 November 2020

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Abstract

Purpose

Political risk factors play a pivotal role in determining the bilateral trade flow of Asian countries in general and the Association for Southeast Asian Nations (ASEAN) countries in particular. The main purpose of this research paper is to examine the impact of disaggregated political risk in lowering the bilateral trade flow of Thailand, a prominent member of ASEAN, vis-à-vis her 132 trading partners.

Design/methodology/approach

Using panel data of Thailand with her partner countries for the period 1984–2015, this paper uses four different panel specifications named pooled ordinary least squares and random effects estimations (estimated generalized least squares estimation) of three types by controlling for cross-sectional heteroscedasticity, time-wise heteroscedasticity and contemporaneous correlation.

Findings

Holding other gravity-based determinants constant, for one unit increase in the ranking of indicator of military in politics at home and abroad, trade flow decreases by 5–9% of the total trade flow of Thailand per year. For other types of political risks like government instability at home and abroad, difficulties in investment profile at home and abroad and internal and external conflict at home and abroad, the decrease is also substantial and most statistically significant. The magnitude of loss due to the military channel at home and abroad can amount to US$9.38–US$16.88 bn per year for Thailand, after controlling for other gravity variables.

Research limitations/implications

The reasons for risk originating from different political channels could be explored at the regional or global level to understand their global and local dimensions.

Practical implications

Policymakers should attempt to resolve the political risks at home and abroad in an amicable manner, through dialogue, so that bilateral trade flow is not inhibited.

Social implications

By taking economic reforms only, the trading problem cannot be resolved until and unless Thailand involves her society, politics and administrative mechanisms in a conducive manner to facilitate her trade. A dialogue among bureaucracy, political authority and military is beneficial in mitigating political risks.

Originality/value

The paper is unique in the sense that it makes a solid attempt to identify the potential channels of disaggregated political risk in affecting trade flow negatively, in a gravity framework, by controlling for different kinds of error structure.

Keywords

Acknowledgements

Funding: This research is partly supported by Chiang Mai University.The authors are grateful to Professor Ilan Alon, the Editor, Professor Khaled Hussainey, the Senior Area Editor of the journal and three anonymous reviewers for kindly providing them with valuable suggestions that greatly helped in improving the quality of the revised version. However, the authors are solely responsible for error if there is any. The first author acknowledges the data processing support from Rafe R. Hannan and ARM Mehrab Ali and copy-editing and proof-reading service from Professor Norman K. Swazo.

Citation

Goswami, G.G. and Panthamit, N. (2020), "Does political risk lower bilateral trade flow? A gravity panel framework for Thailand vis-à-vis her trading partners", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-07-2020-0755

Publisher

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Emerald Publishing Limited

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