## Demystifying Trade Patterns In A Fragmenting World

_IMF Working Papers, June 27, 2025_

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## Bibliographic details
- Authors: Tatjana Schulze, Weining Xin
- Published: June 27, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229011679.001

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### Central distinction and research question
- Draws a distinction between:
  - Trade reallocation — countries increase domestic production to substitute for declining Chinese exports to the US.
  - Trade rerouting — countries serve as one-stop place for transshipment of Chinese exports to the US.
- Asks whether rising shares in US imports for so-called “connector” countries reflect trade reallocation, trade rerouting, or other factors (for example, growing domestic markets and Chinese supply chain reconfiguration).

### Data, methods, and scope
- Leverages granular data on trade and FDI flows and global input-output linkages.
- Focuses on six Asian countries.
- Zooms in on value-added components of trade.
- Deploys a synthetic control approach to disentangle trade reallocation from trade rerouting.

### Key findings
- The connector role of the six countries may reflect:
  - Growing domestic markets, and
  - Chinese supply chain reconfiguration,
  - Beyond simple trade rerouting from China to the US.
- Evidence across the six countries:
  - For five of the six countries, evidence remains elusive on whether increases are due to trade reallocation versus rerouting.
  - Vietnam appears to have benefited from trade reallocation:
    - Increased domestic content in its exports to the US in strategic sectors, rather than facilitating significant transshipment of Chinese exports to the US.
    - Domestic production expansion also helped increase domestic content in Vietnam’s exports to the rest of the world.
    - This expansion may be partly due to Chinese firms relocating to Vietnam through greenfield FDI.
- Longer-run implication:
  - Despite potential short-term gains from trade reallocation, it increases connector countries’ vulnerability to geoeconomic fragmentation with losses to all countries in the long run.

### Policy-relevant implications and considerations
- Distinguish policy responses aimed at:
  - Supporting genuine domestic production expansion (trade reallocation) versus
  - Addressing transshipment and routing behaviors (trade rerouting).
- Monitor FDI patterns (including greenfield FDI) as a mechanism for production relocation and increased domestic content.
- Consider vulnerabilities from geoeconomic fragmentation:
  - Short-term gains in connector countries may come with increased long-run vulnerabilities and potential losses across countries.

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_Source: https://www.imf.org/en/publications/wp/issues/2025/06/27/demystifying-trade-patterns-in-a-fragmenting-world-567071_