Xiaohuan Lan (CKGSB) Ben Li (Boston College)

2012.11.05

The Economics of Nationalism and Trade

1998 NATO’s Bombing of Chinese Embassy in Belgrade

2008 Olympics Torch Relay in Paris

2012 Diaoyu Island

An economic theory of nationalism (I)

Forming a nation: Benefits: lower costs of domestic trade, larger domestic

market Cost: living with people with different cultures or races. Equilibrium: optimal size of a nation

Alesina, Spolaore, and Wacziarg (2000)

An economic theory of nationalism (II)

Uneven globalization shocks in regions within a nation

The shocked regions rely less on the domestic market Disagreement with the current country size as optimal

(prefer a smaller country) Less nationalistic

Empirical Evidence

A one standard deviation increase in the economic openness reduces nationalism by 0.2 standard deviation

Across 200 cities in China in 2009: the unique data of Chinese Political Compass (CPoC)

Before and after the membership of WTO, across 20 provinces in China from 2001 to 2007: the World Value Survey

Across 15 countries from 2001 to 2007: the World Value Survey

Channels: not through protectionism, pride of national culture, or other related political ideologies

Literature: non-economic consequences of international trade

Wars: Martin, Mayer and Thoenig (2008, 2012); Skaperdas and Syropoulos (2001)

Military spending: Acemoglu and Yared (2010)

Institutional quality: Acemoglu, Johnson, Robinson (2005) Slavery trade and mistrust in Africa: Nunn and Wantchekon (2011)

Of course, a large literature on protectionism

Literature: nationalism affects economic behavior

Boycott of French wines in the U.S. in 2003, no effect on sales: Ashenfelter, Ciccarella, and Shatz (2007)

Boycott of France in the U.S. reduced bilateral trade: Michaels and Zhi (2010)

Boycott of French cars in China in 2008: sales fell. Hong et.al. (2011)

Adverse shocks of Sino-Japan relations on the bilateral trade in 2005 and 2010: Fisman, Hamao, and Wang (2012)

A large literature of nationalism in other social sciences

Lots of case studies, general weak empirical evidence

A model from the perspective of economics empirical tests

Our focus on the within-country analysis: history, ethnicity, geopolitics, and trade policy are constant.

Separate different channels

The Model (I)

N symmetric regions, each of which (i) uses a local specific factor K(i) to produce a tradable good X(i).

Each region also makes and consumes a non-tradable aggregate good:

Within-border trade is costless. Cross-border trade incurs an iceberg cost

Utility function: consumption increases with the size of country S(i)

The Model (II)

Optimal country size

Nationalism in Home is the endorsement of the S* as the best size of the domestic market.

Congruent with nationalism defined in social sciences

Handler (1988) on nationalism

“Nationalism is an ideology about individuated being. It is an ideology concerned with boundedness, continuity, and homogeneity encompassing diversity [...] [O]ur notions of “nation” and “state” imply similar senses of boundedness, continuity, and homogeneity encompassing diversity. The state is viewed as a rational, instrumental, power-concentrating organization. The nation is imagined to represent less calculating, more sentimental aspects of collective reality. Yet both are, in principle, integrated: well-organized and precisely delimited social organisms. And, in principle, the two

coincide.”

The Model (III)

A globalization shock hits some regions in each country:

the optimal size of the country for the these regions is now:

Two effects: a growth effect and a “relative-importance” effect

Conditional on income, globalization-hit regions have weaker nationalism because it no longer endorses the same domestic market as other regions

Through the economic openness: imports+exports

Illustration 1 Home Foreign

(Country formation)

Home Foreign

(Globalization)

15

Illustration 3

Home

(Globalization weakens nationalism)

16

Chinese Political Compass

the prototype: the UK website Political Compass test questions: customized to the Chinese socio-economic context.

appraise 50 statements on a four-point scale. Responses mapped using an algorithm to generate a test report. – authoritarianism vs. libertarianism (politically)– conservatism vs. liberalism (culturally)– collectivism vs. neoliberalism (economically)

Strictly anonymous; IP addresses are identified; year 2009; mainland only.

The CPoC Self-Evaluation (I)

The CPoC Self-Evaluation (II): [-2, 2] from left to right

The CPoC Self-Evaluation (III): Compare yourself with other people

Political regime Economy Culture

20

Representativeness of the CPoC sample

Representative of the Chinese population? No.

Representative of the Chinese internet users? 29% of the whole population in 2010 Younger, richer, more educated, more urban residents Current or future Chinese middle class

Altogether, more than 300,000 participants in CPoC In our 2009 sample, 54,602 participants with a mainland IP address,

across 303 cities/prefectures (out of 333 cities)

Various checks on the sample selection

Measure Nationalism

[N1] assertion of the national unity (Gellner 1999)

National unity and territorial integrity are the interests of paramount priority for a society. (国家的统一和领土完整是社会的最高利益 ) [N2] protecting national interests from other countries (Hobsbawm,1990)

Given sufficient comprehensive national power, China has the right to take any measure to protect its interests. (如果国家综合实力许可，那么中国有权为了维护自己的利益而采取任何行动 )

[N3] militarism (Posen, 1993)

All students, regardless of whether they are in college, high school, or elementary school, should attend the military training arranged by the government.(无论中小学生或大学生，都应参加由国家统一安排的军训 ) [N4] anti-foreign sentiments (Gries, 2005)

Western countries, headed by the United States, will not really allow China to become a world-class powerful nation.(以美国为首的西方国家不可能真正容许中国崛起成为一流强国。 )

The Index of Nationalism: simple average of the four

Correlation matrix

Principle Component Analysis

Number of Observations=54,602  N1 N2 N3 N4N1 1      N2 0.339 1    N3 0.392 0.237 1  N4 0.384 0.299 0.289 1

The Distribution of Chinese Nationalism(Mean=2.907, Standard Deviation=0.123)

OLS Results: a one standard deviation increase in the economic openness reduces nationalism by 0.2 standard deviation(number of obs=200)

Nationalism index

Nationalism index

Nationalism index

Nationalism index

Econ-open -0.124*** -0.102** -0.113** -0.113**

(0.037) (0.039) (0.053) (0.055)Geo-open 0.036 0.042 0.042*

(0.022) (0.027) (0.025)Other control NO NO YES YES

Political propaganda

NO NO No -0.067(0.209)

Other controls: GDP per capita, College education, Rural population, Gov’t budget in GDP

On Political Propaganda

“Official ideologies of states and movements are not guides to what it is in the minds of even the most loyal citizens or supporters.”

Eric Hobsbawm (1992)

Nationalism and Protectionism

Measure Protectionism: [P1] High tariffs should be imposed on foreign counterparts of domestic

products, in order to protect national industries (应当对国外同类产品征收高额关税来保护国内民族工业 )

[P2] Foreign capital in China should be restricted from developing at (their) will.(在华外国资本应该受到限制，不能任意发展 )

Regress the index of nationalism on P1 and P2, then take residuals

Nationalism residuals

Econ-open -0.106**

(0.049)All other controls YES

Instrumental Variable

Each city sells and buys different products from different trade partners The prediction power of the gravity equation on trade volumes IV: distance-weighted GDP of trade partners

Data: product-destination-city-year trade data from the China Customs Statistical Information Service

Exogeneity: the GDP of foreign countries is beyond the control of a certain city; constant trade policies across China

Concern: nationalism drives the selection of trade partners?

(various robustness check: without the US, Japan, the EU, OECD countries, War8 countries, NATO countries etc.)

2SLS Results: a one standard deviation increase in the economic openness reduces nationalism by 0.27 standard deviation(number of obs=200)

Nationalism index

Nationalism index

Nationalism index

Nationalism index

Nationalism Residuals

Econ-open -0.158*** -0.138*** -0.160** -0.159** -0.158**

(0.037) (0.046) (0.065) (0.065) (0.063)Geo-open 0.028 0.034 0.034 0.032

(0.025) (0.028) (0.028) (0.024)Other control

NO NO YES YES YES

Political propaganda

NO NO No YES YES

First-stage 11.434*** 10.587*** 8.559*** 8.606*** 8.606***

(1.224) (1.212) (1.290) (1.285) (1.285)

Cultural Origin of Nationalism: Smith (1999), Anderson (2001)

Measure attitudes towards Chinese traditional culture [Chinese Medicine] Traditional Chinese medicine exceeds modern mainstream

medicine in a number of ways. (中国传统医学具有一些现代主流医学不能比拟的优势 )

[Zhou-yi] Zhou-yi and Ba-gua are great achievements of our forefathers and can explain a wide range of phenomena. (周易八卦是老祖宗智慧的结晶，能够有效的解释很多事情 )

[Confucianism] Modern China needs Confucianism. (现代中国社会需要儒家思想 )

The channel is not culture

Medicine Zhou-yi Confucianism Nationalism Residuals

OLS 2SLS OLS 2SLS OLS 2SLS OLS 2SLS

ECON -0.054 0.075 -0.036 -0.012 0.005 0.021 -0.098* -0.179***OPEN (0.055) (0.073) (0.038) (0.056) (0.057) (0.072) (0.054) (0.067)

Not through channels of other related political ideologies either: collectivism, populism, conservatism etc.

Other concerns: driven by extreme opinions…

Analysis within China, over time

Control for regional fixed effects The natural experiment of becoming a member of the WTO before

and after 2001

Data: World Value Survey in China (WVS) in 2001 and 2007 Advantages: the independent data source; widely used; individual-

level demographic variables Disadvantages: small number of observations (2, 038); province-

level analysis

The Difference-in-difference Strategy

Unbalanced effects of the WTO membership

High (trade) exposure regions: the Yangtze River Delta and the Pearl River Delta two trade centers: Shanghai and Hongkong 4 provinces located in the two deltas: Shanghai, Zhejiang,

Jiangsu, Guangdong

Low (trade) exposure regions: other 16 provinces

Unbalanced Effect of the WTO on the Trade Volume

WTO Membership

High-exposure provinces

Low-exposure provinces

0.5

11.5

op

en

ne

ss

1995 2001 2007 2010year

Unbalanced Change in Nationalism

High-exposure provinces

Low-exposure provinces

1.8

1.9

22.1

2.2

na

tion

alism

2001 2007year

DID Estimates(individual demographics: gender, age, marital status, education, income)

Province-level Individual-level

High-exposure dummy 0.077 0.057

(0.051) (0.059)After WTO dummy -0.103** -0.076

(0.047) (0.049)Interaction -0.155** -0.215***

(0.072) (0.064)Log(GDP per capita) YES YES

Demographics NO YES

Number of obs 40 1,806

Fixed-Effects estimates: a one standard deviation increase in the economic openness reduces nationalism by 0.21 standard deviation

Cross-Country Analysis

The rationale applies to cross-country analysis Must control for country fixed effects infer causality? trade policy could be endogenous

WVS 2001 and 2007, 15 countries Data of GDP and trade: the Penn World Table

(v 7.0)

Levels of Nationalism in 2007

SwedenKorea

JapanArgentina

SpainChile

IndonesiaCanada

South AfricaMexicoMoroccoChina

India

USA

Turkey

1.6

1.8

22.2

2.4

Inde

x o

f N

atio

nalis

m in

200

7

Change in nationalism v.s. change in openness 2001 to 2007

Sweden

Korea

Japan

Argentina

Spain

ChileIndonesia

Canada South AfricaMexico

Morocco

China

India

USA

Turkey

-.2

-.1

0.1

.2

de

tre

nd

ed

ch

an

ge

of na

tion

alism

-.2 -.1 0 .1 .2detrended change of openness from 2001 to 2007

Turkey and Argentina

Turkey Full membership negotiation with the EU started in 2004, accompanied by

the high uncertainty in Turkey of being finally accepted by the EU. A sense of double-standards skepticism and mistrust significantly

strengthened the country's nationalism (Keyman and Yilmaz, 2006)

Argentina economic collapse in 2001, default on external debts in 2002 seriously

damaged its national pride. “for a while it was as though Argentina had no possible future and was

doomed to descend into poverty and shame” (Domingues, 2006).

Country Fixed Effects Estimates: a one standard deviation increase in the economic openness reduces nationalism by 0.25 standard deviation

Country-level Individual-level

Econ-open -0.648** -0.708**

(0.274) (0.289)Country Fixed Effects YES YES

Year Fixed Effects YES YES

Log(GDP per capita) NO YES

Demographics NO YES

Number of obs 30 73,866

Concluding Remarks

(On Scottish independence) ... just 21% of Scots would favour independence if it would leave them £500 ($795) a year worse off, and only 24% would vote to stay in the union even if they would be less well off sticking with Britain. Almost everyone else would vote for independence if it brought in roughly enough money to buy a new iPad, and against it if not.

The Economist, April 14th, 2012