The Relationship between Political Tensions,Trade and Capital Flows in ASEAN Plus Three

We estimate the effects of political tension on trade and capital flows in ASEAN Plus Three countries in the framework of a gravity model. We quantify political tension through text‐parsing software reading daily Reuters’ articles from 1990 to 2013 and exclude Brunei and Laos due to sparsity of news coverage. Regarding bilateral trade, we find that political conflict, measured by negative reports in Reuters’ articles, seems to only affect bilateral trade between countries that are not both members of the World Trade Organization (WTO). For these countries, a 1 per cent rise in the tension score results in a 0.05 per cent decline in trade. There is weaker evidence that improvement in bilateral relationship, measured by positive reports in Reuters’ articles, is associated with more trade. As for capital flows, while long‐term capital flows, measured by foreign direct investment, appear to be unaffected by short‐term tensions, both a non‐democratic government and a history of war negatively affect FDI.