International Friends and Enemies
We develop sufficient statistics of countries' bilateral income and welfare exposure to foreign productivity shocks that are exact for small shocks in the class of models with a constant trade elasticity. For large shocks, we characterize the quality of the approximation, and show it to be almost exact. We compute these sufficient statistics for over 140 countries from 1970-2012. We show that our exposure measures depend on market-size, cross-substitution and cost of living effects. As countries become greater economic friends in terms of welfare exposure, they become greater political friends in terms of United Nations voting and strategic rivalries.
We are grateful to Princeton University for research support. We would like to thank Gordon Ji and Ian Sapollnik for excellent research assistance. We are also grateful to Costas Arkolakis, Dave Donaldson, Jonathan Eaton, Andrés Rodríguez-Clare, Shang-Jin Wei, Daniel Xu and conference and seminar participants at Nottingham, National Bureau of Economic Research (NBER), and Princeton for helpful comments and suggestions. We are grateful to Robert Feenstra and Mingzhi Xu for generously sharing updates of the NBER World Trade Database. The usual disclaimer applies. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.