International Friends and Enemies

We develop new network measures of exposure to foreign productivity and trade cost shocks for more than 140 countries over more than 40 years from 1970-2012. We derive these exposure measures from a friend-enemy matrix representation of the first-order general equilibrium effects of productivity and trade cost shocks. This representation is exact for small shocks, permits an analytical characterization of the quality of the approximation for large shocks, and is almost exact for empirically-reasonable productivity shocks and trade elasticities. We recover the entire network of bilateral income and welfare exposure from a single matrix inversion, without requiring a separate counterfactual for each productivity or trade cost shock. Our measures are therefore well suited to empirical applications in which this entire network of income and welfare exposure is a key object of interest. We provide an external validation of our measures by showing that they predict country selection into future preferential trade agreements (PTAs) and successfully capture the subsequent effects of these agreements in increasing interdependence between countries. We show that as countries become greater economic friends in terms of welfare exposure predicted by geography, they become greater political friends in terms of United Nations voting and strategic rivalries.