The role of geopolitics in international trade

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.