DP6380 Freedom Fries

Author(s): Guy Michaels , Xiaojia Zhi

Publication Date: July 2007

Keyword(s): Discrimination , Trade

JEL(s): F14 , J15

Programme Areas: Labour Economics

Link to this Page: www.cepr.org/pubs/dps/DP6380.asp

Do firms choose inputs that minimize their cost of production, ignoring the attitudes of their owners and employees? We examine this question using an episode of worsening relations between the US and France: from February 2002 to March 2003, France's favourability rating in US public opinion polls fell from 83 percent to 35 percent. Very negative attitudes towards France became common even among college educated Americans with high levels of income, so they were likely prevalent among managers. Using data from 1999-2005, we find that the worsening relations reduced US imports from France by about 15 percent and US exports to France by about 8 percent, compared to other Eurozone or OECD countries. This decline was due in large part to a fall in France's share of the quantity of inputs traded between the Eurozone and the US; this decline is significant even after we control for changes in the product composition of trade flows. We also find that the decline in trade was accompanied by a similar drop in both business trips and tourist visitations of US residents to France compared to Western Europe. Taken together, our findings suggest that competition cannot eliminate the effect of attitudes on firms' choice of inputs.