Long Live Globalization: Geopolitical Shocks and International Trade

IMF Working Papers, October 27, 2023

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Research question: Are we really witnessing the death of globalization given recent geopolitical shocks and calls for protectionist and nationalist policies?
Empirical approach: Develops an augmented gravity model of bilateral trade flows.
Dataset scope:
- "more than 4 million observations"
- 59,049 country-pairs
- Period: 1948–2021

Geopolitical alignment:
- The geopolitical alignment between countries has contradictory and statistically insignificant effects on trade, depending on the level of economic development.
- The economic magnitude of this geopolitical effect is not as important as income or geographic distance.
- The geopolitical effect diminishes significantly when extreme outliers are removed from the sample.
Income and distance:
- The level of income in both origin and destination countries has a positive impact on trade.
- Greater geographic distance between countries reduces bilateral trade due to higher trade costs.
Other determinants:
- Cultural similarities and historical ties are important in shaping trade flows.
- Trade agreements tend to lead to higher levels of international trade.

Relative importance of drivers:
- Income levels and geographic distance remain more important determinants of bilateral trade than geopolitical alignment.
Sensitivity to outliers:
- Robustness checks removing extreme outliers materially weaken the measured geopolitical effect, suggesting caution in attributing large trade shifts to geopolitics alone.
Trade policy considerations:
- Given the persistent positive role of trade agreements and cultural/historical ties, policy shifts toward protectionism should weigh these enduring drivers of trade.

Source: Serhan Cevik, "Long Live Globalization: Geopolitical Shocks and International Trade", IMF Working Papers No. 2023/225 (October 27, 2023).