| Summary/Abstract |
What is the relationship between political tensions and economic relations? In this study, we explore this question by examining how Japan’s nationalization of the Diaoyu/Senkaku Islands, a territory much disputed with China, has affected bilateral trade between the world’s second and third largest economies. Using monthly data, we find that the nationalization imbroglio has negatively affected the amount of goods Japan exports to China, with the effect being most pronounced for highly salient and visible products such as automobiles and cameras; these experienced immediate and dramatic drops lasting up to 12 months. In contrast, raw materials and intermediate goods were not affected at all; some even experienced increased exports. These findings suggest that consumer and corporate responses to political tensions may follow different logics. For consumers, certain political tensions, especially those involving enduring territorial disputes, could override entrenched economic interests and preferences, at least in the short term. In these instances, it will no longer be business as usual.
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