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CEP discussion paper
International friends and enemies
Benny Kleinman, Ernest Liu and Stephen J. Redding
July 2020
Paper No' CEPDP1708:
Full Paper (pdf)

JEL Classification: F14; F15; F50

Tags: productivity growth; trade; welfare

We develop sufficient statistics of countries’ bilateral income and welfare exposure to foreign productivity shocks that are exact for small shocks in the class of models with a constant trade elasticity. For large shocks, we characterize the quality of the approximation, and show it to be almost exact. We compute these sufficient statistics for over 140 countries from 1970-2012. We show that our exposure measures depend on market-size, cross-substitution and cost of living effects. As countries become greater economic friends in terms of welfare exposure, they become greater political friends in terms of United Nations voting and strategic rivalries.