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Beyond borders: how geopolitics is reshaping trade

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  • Bosone, Costanza
  • Stamato, Giovanni

Abstract

Rising trade tensions, a spate of trade-inhibiting policy measures and a weakening of multilateral institutions have sparked a growing concern about the potential implications of global trade fragmentation. Yet, empirical evidence that geopolitical considerations are already materially affecting trade flows is scant. In this study, we quantify the impact of geopolitical tensions on trade of manufacturing goods over the period 2012-2022 in a structural gravity framework. To capture the influence of geopolitical tensions, we use a measure of geopolitical distance based on UN General Assembly voting. The econometric analysis offers robust evidence that geopolitical distance has become a trade friction and its impact has steadily increased over time. Our results suggest that a 10% increase in geopolitical distance, like the observed increase in the US-China distance since 2018, is associated with a reduction in trade by about 2%. Our findings also highlight a differential and stronger impact on advanced economies and the emergence of friend-shoring. JEL Classification: F10, F13, F14, F15

Suggested Citation

  • Bosone, Costanza & Stamato, Giovanni, 2024. "Beyond borders: how geopolitics is reshaping trade," Working Paper Series 2960, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20242960
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    More about this item

    Keywords

    friend-shoring; geopolitics; structural gravity models; trade costs; trade fragmentation;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration

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