Do firms hedge against political tensions? Evidence from Chinese food importers of Norwegian salmon

Abstract

AbstractPolitical and economic tensions, which often jeopardise trade, are rising among the world's major powers, and countries like China are more frequently using food‐related trade actions to deal with deteriorating political relations. Using an event study approach, this paper investigates how importers respond to lasting political tensions by examining China's seafood importers' responses to the 6‐year Norway–China political tensions after Norway awarded Liu Xiaobo, a Chinese political dissident, a Nobel Peace Prize in 2010. Our results reveal firm‐level responses at both the intensive and extensive margins. At the intensive margin, firms that imported Norwegian fresh salmon before the sanction saw a 20% persistent decline in their fresh salmon import value and an 80% decrease in the import share of Norwegian fresh salmon products over our study period. At the extensive margin, we find a trade diversion effect that firms imported fresh salmon from Norway to other countries and regions, but also a consistent ‘political hedging’ effect 3 years after sanction with a 20% decline in the maximum import share from any particular country or region, even if not Norway.