The role of geopolitics in international trade

Summary

Focus

International trade has been important for global economic growth for many years. Recently, however, global trade has slowed at the same time as geopolitical tensions have increased. We look at the connection between these developments by studying trade data from 47 economies for around 5,000 sectors between 2017 and 2023. 

Contribution

We use finely disaggregated sectoral data to explore how geopolitical tensions affect trade. We look at whether these tensions have changed the value of trade, and whether this is because of changes in the quantity of goods traded or their prices. The granularity of our data allows us to better control for supply and demand effects compared with alternative approaches.

Findings

We find that the value of trade has decreased, especially between countries that are geopolitically distant from each other. This decline is mainly due to a reduction in the quantity of trade between them. The prices exporters receive, measured in US dollars, have remained relatively stable. This implies that cost increases due to measures like tariffs were passed on to importing economies.

Abstract

Geopolitical considerations have seen economies impose trade restrictions on trading partners with whom they have large geopolitical differences. Here we use granular bilateral trade data across finely disaggregated sectors for 47 economies to examine the effect of geopolitics on trade, and whether this is due to a change in trade quantities or trade prices. We first corroborate existing results in terms of the value of trade – that economies that are less geopolitically aligned tend to trade less with each other. Quantitatively, we find that year-on-year trade values between more geopolitically distant economies grew around 12 percentage points more slowly than between closer ones, on average, over 2017–2023. We then take advantage of our detailed data and show that the decline in trade values mostly reflects a fall in the quantity of goods traded. By contrast, the prices received by exporters (measured in US Dollars) are largely unaffected, indicating that higher costs associated with geopolitical factors, due to measures such as tariffs, were mostly passed on to importers.

JEL classification: F13, F14, F15, F51, F60

Keywords: international trade, geoeconomics, fragmentation