IMF Working Papers

Divided We Fall: Differential Exposure to Geopolitical Fragmentation in Trade

Author/Editor:

Shushanik Hakobyan ; Sergii Meleshchuk ; Robert Zymek

Publication Date:

December 22, 2023

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

This paper assesses differences in countries’ macroeconomic exposure to trade fragmentation along geopolitical lines. Estimating structural gravity regressions for sector-level bilateral trade flows between 185 countries, we find that differences in individual countries’ geopolitical ties act as a barrier to trade, with the largest effects concentrated in a few sectors (notably, food and high-end manufacturing). Consequently, countries’ exposure via trade to geopolitical shifts varies with their market size, comparative advantage, and foreign policy alignments. Introducing our estimates into a dynamic many-country, many-sector quantitative trade model, we show that geoeconomic fragmentation—modelled as an increased sensitivity of trade costs to geopolitics and greater geopolitical polarization—generally leads to lower trade and incomes. However, emerging markets and developing economies (EMDEs) tend to see the largest impacts: real per-capita income losses for the median EMDE in Asia are 80 percent larger, and for the median EMDE in Africa 120 percent larger, than for the median advanced economy. This suggests that the costs of trade fragmentation could fall disproportionally on countries that can afford it the least.

Series:

Working Paper No. 2023/270

Subject:

Income International trade National accounts Plurilateral trade Trade agreements Trade balance Trade barriers

Frequency:

regular