The Trade Effect of Trust: Evidence from Agricultural Trade between China and Its Partners

Abstract

High trust is a booster of trade development, while low trust is a stumbling block. The trust between two countries (regions) will be beneficial to sustainable development for bilateral trade. To investigate the impact of trade partners’ trust on the scale of China’s agricultural export trade, we put trust into the analytical models of international trade, propose a research hypothesis based on the transaction cost economics theory, and construct an extended gravity model for empirical tests. The results show that the level of trust affects the scale of export trade by affecting the size of transaction costs. Higher trust produces trade creation effect, while lower trust produces trade barrier effect. The trade partner’s trust significantly affects the scale of China’s agricultural export trade, and the effect is heterogeneous at different percent quartiles. Even after controlling the endogeneity, the conclusion still holds. We suggest that, in the international trade of agricultural products, the government should constantly improve the quality of formal institution, attach importance to constructing of the informal institution of trust and enhance the social trust to facilitate the development of agricultural trade.