Trading with dictators? A historical review of the EU’s business partners

8 July 2025

By Claudia Marchini and Alexander Popov

Do democratic values play a role in trade? While the weakening of democratic norms around the globe has sparked renewed interest in this question, economic theory and historical examples do not provide a definitive answer.

On the one hand, comparative advantage matters, and so during the 21st century countries with very poor democratic and human rights records, like China and Russia, became indispensable trading partners to mature Western democracies. On the other hand, there is a long tradition of various groups and even whole countries boycotting imported goods produced under dictatorial regimes and/or using forced labour.^[1]

We document the evolution of the democratic profiles of the European Union's trading partners since the mid-1980s. The EU is an especially interesting case study because it has bound itself to a values-based trade policy. EU trade policy aims to ensure that economic development goes hand in hand with democratic and social values. These values include respect for human rights, high labour standards, and social justice.

But does the EU consistently live up to its own self-imposed ethical standards for international trade? Our findings show that, despite its pledges, the EU is indeed increasingly trading with countries run by autocrats and dictators. We see an interruption to this trend only recently.

A democracy-weighted trade index

To better understand the EU’s trading partners, we have constructed a democracy-weighted trade index (DWTI). It covers the EU-15^[2] over the period 1985-2023. We focus on the older EU Member States as most of the newer ones were themselves non-democracies until the late 1980s.

To construct the DWTI, we took imports into the EU and weighted the share of individual trading partners by their score on the Liberal Democracy Index that measures their democratic status. Among other factors, it looks at respect for civil liberties and the rule of law.^[3]

Like the Liberal Democracy Index, our DWTI is available on a scale from 0 to 1. The closer you get to 1, the more democratic the EU’s trading partners are each year. To illustrate this, a hypothetical value of 0.8 or more would imply that the EU-15’s imports all come from high-scoring countries like Norway, New Zealand, and Switzerland. Conversely, a value of 0.1 or less would imply that all imports come from low-scoring countries like Afghanistan, China, and Saudi Arabia.

Over the past 40 years, the EU-15's DWTI score exhibits an inverse U-shaped pattern. Chart 1 shows that between 1985 and the late 1990s, the index score increased significantly. This reflects a broad democratisation trend in eastern Europe, Latin America, and East Asia. The DWTI score reached a maximum of 0.59 in 1999. To have a sense of this development, this aggregate figure could likewise show that all the imports in that year came from India – an established democracy at the time.

However, between 1999 and 2022 the EU-15's DWTI score declined gradually by about one-third, reaching a historical low of 0.41 in 2022. This aggregate figure is analogous to a situation in which half of the imports into the EU-15 come from Canada, a mature democracy, but the other half come from Turkey, a country where the state of democracy has steadily deteriorated in recent years. This development is broadly similar in each EU-15 member state, suggesting that, both as a group and individually, mature European democracies have become less likely to shun autocratic trade partners in the past 25 years. Clearly, despite explicit commitments, the democratic quality of EU trade has taken a hit. However, the DWTI decline halted in 2023. This reflects EU trade sanctions imposed after Russia’s full-scale invasion of Ukraine.

Understanding the post-1999 decline

Why did the democratic profile of Europe’s trading partners decline in the past 25 years? It is possible this development is entirely driven by China. After spending decades outside the international trade system, in 2001 China joined the World Trade Organization. Since then, trade between Europe and China has gradually increased. At present, China accounts for around one-fifth of all imports into the EU, and it ranks 172 out of 179 countries in terms of democratic score.

Given China’s very low score, it could be that the observed deterioration in the democratic profile of the EU-15's imports is entirely the result of EU trade with this very influential partner. It is indeed readily apparent that trade with China results in a lower DWTI value. When we re-calculate the DWTI without China, the index is higher on average by about 0.085 points (Chart 2). However, the downward trend since 1999 holds even when excluding China. The index without China declined by one-fifth over the same period, from 0.629 in 1999 to 0.499 in 2022. These findings thus imply that, while increased trade with China has played a role in the deterioration of democracy-weighted trade, they fail to fully explain the reversal observed in the data starting in the late 1990s.

So, it is not only China that made the difference.

With China ruled out as the sole cause of the DWTI decline, the second possibility is that democracy has been on the retreat globally.

As European consumers import many goods they cannot source locally (like exotic foods or radioactive materials for cancer drugs), the decline in the democratic profile of trading partners could be purely mechanical. But we do not see a global democratic decline. Instead, the data suggest that the median country outside the EU-15 has become more democratic during the last 25 years. Thus, the post-1999 decline is not driven by the fact that the world has generally become less democratic.

This leaves one final possibility. That is a combination of two factors, both of which we find to have been at play – although not at the same time:

(1) the EU-15 has gradually reallocated its imports in favour of less democratic countries;

(2) the quality of democratic governance has declined in the EU-15's trading partners, if not globally.

To reach this conclusion, we first constructed a counterfactual index that fixed each trading partner's Liberal Democracy Index at its 1999 value, and then we examined the actual evolution of bilateral trade after 1999. Comparing the scores of both indices, we find that they move in lockstep between 1999 and 2012. After that period, our counterfactual control stays flat (Chart 3). This suggests that the decline in the DWTI between 1999 and 2012 results from the EU-15 effectively switching from more to less democratic trading partners during those years.

Next, we re-calculated the DWTI the other way around. In particular, we took the trade share of each trading partner in 1999 and fixed it over time. Additionally, we considered the actual value of the Liberal Democracy Index for each trading partner after 1999. In contrast to the first, the score of this second counterfactual index is flat between 1999 and 2012. After that point, the score declines together with the original DWTI (Chart 4). This suggests that holding the relative import intensity constant, the decline in the DWTI after 2012 is driven by a deterioration in the democratic quality of governance in the EU-15's existing trading partners.

In short, after 2012, as the EU traded with the same trading partners, these became less and less democratic.

A headache for the EU?

Our observations present the EU with several challenges. The first – and most obvious – is to its reputation as a values-based economic and political union. The decline in the quality of democratic governance of its average trading partner since 1999 can be perceived as inconsistent with the EU's sustainable trade policy goals of respecting democratic, human, and social rights.

This, as for the last 25 years it has increasingly traded with autocrats and dictators, the EU can’t successfully claim. But there is also some less negative news on this front. The sanctions on Russia have significantly improved the democratic profile of EU trade. So, values do seem to play a role, at least when decisively applied.

The second challenge: “trading with dictators” amounts to generating profits for regimes that often have an explicit expansionary and militaristic agenda, and increased geopolitical risk has implications for all aspects of the global economic order. This includes monetary policy, financial stability and international capital flows, especially for an open economy such as Europe's. Ultimately, this can potentially become an existential challenge to the EU.

The third challenge: our findings suggest a trade-off associated with the green transition. Current low-carbon technologies rely on a range of rare earth materials that are typically found in countries with autocratic regimes.^[4]

Take electric batteries which are a staple of our strategy to address the climate crisis. Their production involves four main metals – cobalt, copper, lithium, and nickel – of which the EU has almost no domestic reserves. Except for copper, all are sold in international markets primarily by countries with a non-democratic government, such as China, Russia, and the Democratic Republic of Congo. Abuses in the extraction of these raw materials in the form of prisoner and child labour have been well-documented. The risk is that, in attempting to address one externality (carbon emissions), we inadvertently worsen another one (human rights abuses in other countries).

The world is currently rife with geopolitical risk. Europe is facing an unprecedented challenge to secure its supply chains. Paying more attention to whom we trade with would be simultaneously consistent with the principles we have tied ourselves to and good economic policy.

The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.

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