Divided We Fall: Differential Exposure to Geopolitical Fragmentation in Trade

IMF Working Papers, December 22, 2023

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Canonical URL: Divided We Fall: Differential Exposure to Geopolitical Fragmentation in Trade

Differences in individual countries’ geopolitical ties act as a barrier to trade.
Largest sectoral effects are concentrated in a few sectors, notably food and high-end manufacturing.
Countries’ exposure via trade to geopolitical shifts varies with market size, comparative advantage, and foreign policy alignments.
Geoeconomic fragmentation—modelled as an increased sensitivity of trade costs to geopolitics and greater geopolitical polarization—generally leads to lower trade and incomes.
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 than for the median advanced economy.
- Real per-capita income losses for the median EMDE in Africa are 120 percent larger than for the median advanced economy.
Conclusion: The costs of trade fragmentation could fall disproportionally on countries that can afford it the least.

Estimation approach:
- Structural gravity regressions for sector-level bilateral trade flows.
- Sample covers 185 countries.
Quantitative framework:
- Estimates from gravity regressions are introduced into a dynamic many-country, many-sector quantitative trade model.
Key modelled mechanisms:
- Increased sensitivity of trade costs to geopolitics.
- Greater geopolitical polarization.

Sectoral concentration:
- Largest trade-barrier effects observed in food and high-end manufacturing.
Cross-country determinants of exposure:
- Market size.
- Comparative advantage.
- Foreign policy alignments.

Aggregate effect:
- Geoeconomic fragmentation generally reduces trade and incomes.
Disproportionate effects on EMDEs:
- Median EMDE in Asia: real per-capita income losses are 80 percent larger than for the median advanced economy.
- Median EMDE in Africa: real per-capita income losses are 120 percent larger than for the median advanced economy.
Implication:
- Costs of trade fragmentation could be concentrated among countries least able to bear them.

Authors: Shushanik Hakobyan, Sergii Meleshchuk, Robert Zymek
Publication date: December 22, 2023
Series: IMF Working Papers, Working Paper No. 2023/270
Pages: 51
DOI: https://doi.org/10.5089/9798400262302.001
ISBN: 9798400262302
ISSN: 1018-5941
Subjects: Income, International trade, National accounts, Plurilateral trade, Trade agreements, Trade balance, Trade barriers
Keywords: Africa, Asia and Pacific, emerging markets and developing economies, foreign policy alignment, Geoeconomic fragmentation, Global, gravity, Income, Middle East and Central Asia, Plurilateral trade, Sub-Saharan Africa, Trade agreements, Trade balance, trade barriers, trade cost, trade fragmentation, trade model

IMF Working Paper by Shushanik Hakobyan, Sergii Meleshchuk, and Robert Zymek (December 22, 2023).