1. Business as Usual: Economic Responses to Political Tensions Christina Davis and Sophie Meunier Princeton University

2. The Puzzle France-US tensions over IraqSino-Japanese tensions over shrine Worsening political relations and Deepening economic ties

3. Theoretical Approaches Alliances, security, and trade Alliances, security, and trade Security externalities encourage trade to follow the flag (e.g. Gowa and Mansfield) Security externalities encourage trade to follow the flag (e.g. Gowa and Mansfield) Commercial peace Commercial peace Economic interdependence encourages cooperative political relations (e.g. Oneal and Russett) Economic interdependence encourages cooperative political relations (e.g. Oneal and Russett) Linkages between political and economic relations Linkages between political and economic relations Empirical evidence mostly examines patterns of trade and war Empirical evidence mostly examines patterns of trade and war Questions about endogeneity Questions about endogeneity Do causal mechanisms operate at lower threshold of conflict? Do causal mechanisms operate at lower threshold of conflict?

4. Hypotheses Politics first Politics first Political tensions reduce economic interactions Political tensions reduce economic interactions Economics first Economics first Risk of economic damage from political tensions mobilizes lobbying for improved relations Risk of economic damage from political tensions mobilizes lobbying for improved relations Separation of politics and economics Separation of politics and economics Political tensions have little effect on economic interactions as private actors respond only to economic information Political tensions have little effect on economic interactions as private actors respond only to economic information

5. The Franco-American Relationship Disagreement over Iraq war Disagreement over Iraq war Calls for boycotts on both sides Calls for boycotts on both sides No downturn in trade or investment No downturn in trade or investment McDonald’s posts best sales ever in France McDonald’s posts best sales ever in France No effects on American imports of French goods (except wine) No effects on American imports of French goods (except wine)

8. Sino-Japanese Relationship Political crisis over history issues and rivalry Political crisis over history issues and rivalry Demonstrations and boycott calls Demonstrations and boycott calls Suspension of high-level leader meetings Suspension of high-level leader meetings Trade and investment continues to grow Trade and investment continues to grow Toyota enjoys rapidly growing sales in China Toyota enjoys rapidly growing sales in China Japanese firms plan to maintain or expand investment Japanese firms plan to maintain or expand investment “Cold Politics, Hot Economics” “Cold Politics, Hot Economics”

11. Explaining the Results Politics first Politics first Trade follows the flag Trade follows the flag Intensity of tensions Intensity of tensions Economics first Economics first Lobbying and feedback loop Lobbying and feedback loop Politics and economics as separate spheres Politics and economics as separate spheres Economic interdependence Economic interdependence

12. Micro-Level Conditions TransnationalitySubstitutability Regulatory and procurement decisions

13. A Temporal Threshold Duration of tensions and consumer boycotts Duration of tensions and consumer boycotts The “animosity model of foreign product purchase”: long-term impact of political tensions on brands and products (Klein et al.) The “animosity model of foreign product purchase”: long-term impact of political tensions on brands and products (Klein et al.) Durable, long term impact on brands Durable, long term impact on brands

14. International Economic Governance Negative effect on cooperation Negative effect on cooperation Spillover of political tensions on protectionism Spillover of political tensions on protectionism Grandstanding Grandstanding Cross-issue linkages Cross-issue linkages Positive effect on cooperation Positive effect on cooperation Shelter from political tensions Shelter from political tensions Over-compensation Over-compensation More economic liberalization More economic liberalization

15. Conclusion Findings Findings Overall insulation between economics and politics Overall insulation between economics and politics Firewall not impenetrable Firewall not impenetrable Implications Implications Questions how governments direct economic flows under globalization Questions how governments direct economic flows under globalization Shows linkage between politics and consumer behavior (for select markets and over long term) Shows linkage between politics and consumer behavior (for select markets and over long term) Need further research to measure effects of political tensions - more common than wars Need further research to measure effects of political tensions - more common than wars