Abstract

An interconnected world increases economic efficiency while giving certain countries leverage over others. We aim to describe and understand international power stemming from trade. Using an illustrative model of trade with possibilities of bilateral disputes and ex-post hold-ups, we highlight that bilateral asymmetry in import dependence can be a source of power towards one another. We construct the model-implied measure of international power — asymmetric bilateral import dependence, weighted inversely by sectoral trade elasticities — across country pairs over the past 20 years. Combining this measure with comprehensive data on bilateral engagement events and a high-frequency measure of bilateral geopolitical relationships, we examine the consequences and strategic causes of international power. We show two main empirical results. First, increases in international power between countries — which raise the credibility of threats of trade disruptions — induce more bilateral engagement and negotiations. Second, worsened geopolitical relationships — in anticipation of future disputes — prompt countries to build up greater international power through adjusting trade activities.