Instrumental Variables and Causal Mechanisms: Unpacking the Effect of Trade on Workers and Voters

We identify how German voters responded to the labor market turmoil caused by increasing trade with low-wage manufacturing countries. We first establish that import competition increased voters’ support for only extreme (right) parties. We then decompose this populist ‘total effect’ of trade on voting into a ‘mediated effect’ running through labor market adjustments and an independent ‘direct effect’. Our Causal Mediation Analysis reveals that direct and indirect effect work in opposite directions.