How Geopolitics Influence Chinese Firms’ Exports: Firm-Level Evidence of “Friendtrading” Under Extreme Events

This paper investigates how geopolitical relationships shape Chinese exports, asking whether exporters systematically favor politically aligned countries — and whether that preference holds during periods of geopolitical turbulence. We leverage a unique high-frequency panel of over 17 million monthly firm-product-destination transactions from Chinese Customs (2000–2006), matched with the Political Relationship Index (𝑃𝑅𝐼) developed by Tsinghua University, which captures monthly bilateral diplomatic relations from a Chinese perspective. Unlike most studies on geopolitics and trade, we move beyond the typical Western-centric lens of geopolitical risk and focus on export-side behavior. Our empirical strategy is robust: it combines rich fixed effects (firm-product, destination, time), sectorial tariff controls, and interactions with indicators of extreme positive and negative diplomatic events. Our results consistently show that stronger political alignment increases Chinese firms’ exports in both value and quantity. We also find evidence of non-linearity and asymmetric responses: exporters react more strongly to diplomatic improvements than to deteriorations. Using extreme geopolitical events, we show that positive events amplify the export response to political alignment, while negative events tend to dampen it. The patterns are strongest for foreign-invested firms and for differentiated products, suggesting that geopolitical alignment plays a critical role in global value chain dynamics. These findings contribute to understanding how firms incorporate political signals into trade decisions. In a world of growing political fragmentation, “friendtrading” is not just a policy discourse — it is reflected in the strategic behavior of exporters, even in the absence of formal sanctions.