International Institutions and Spillover Effects

• In Event: Political Economy of Economic Statecraft

Abstract

This paper examines the spillover effects of global governance by looking at how international soft law on combating illicit financing has impacted global trade. In the aftermath of the 2008 financial crisis, large economies imposed new international banking standards as part of a broader effort to stop money laundering and terrorist financing. As governments began to adopt and enforce these rules, banks terminated thousands of cross-border banking relationships and drastically reduced the availability of bank-intermediated trade financing, particularly in weaker economies. While models of international trade often ignore financial constraints, the policy community estimates a USD 1.5 trillion annual gap in trade financing. Using the standard gravity model of trade, I show that the international effort to stop illicit financing is associated with significant declines in exports when the exporting country has characteristics associated with trade financing dependence. My findings suggest that international security cooperation has damaged economic opportunities in some of the most vulnerable countries. It also highlights the need for scholars to consider the spillover effects of cooperation when evaluating the impact of global governance.

Author

• Julia C. Morse, University of California, Santa Barbara