The impact of geopolitical risk on US and Euro Area trade
Khalil et al. examine the effects of geopolitical risk (GPR) shocks on bilateral imports for the United States and euro area. The authors use a detailed product-level panel dataset covering 20 years of US and euro area import data. They employ local projections to estimate the impact of trading partner-specific GPR shocks on import volumes and prices.
Key findings
- Overall effects: On average, trading partner GPR shocks lower import volumes and raise import prices for both the US and euro area.
- Geopolitical distance: The decline in imports is stronger when GPR shocks hit countries that are geopolitically distant from the US and euro area.
- US sanctions: GPR shocks have larger negative effects on import volumes when they coincide with US import sanctions on the affected country.
- Global value chains: GPR shocks reduce global value chain-related trade more than non-GVC trade, suggesting a shortening of bilateral value chains.
- US dollar and oil prices: Chinese GPR shocks lead to USD appreciation and lower global oil prices, which have differential effects on US vs euro area.
- China-specific effects:
– GPR shocks originating in China have particularly large negative effects on US and euro area imports from China.
– Chinese GPR shocks also affect US and euro area imports from non-Chinese trading partners, partly due to USD exchange rate movements, global oil price changes, and GVC linkages.
Trade dynamics under geopolitical risk
Authors: Makram Khalil, David Osten, Felix Strobel
From: Deutsche Bundesbank, Johns Hopkins University
Geopolitics and global currency dynamics
Koosakul et al. examine how geopolitical proximity affects the usage of major currencies in cross-border transactions, focusing on the five SDR currencies: US dollar, euro, Chinese renminbi, Japanese yen, and British pound. The authors used a panel regression analysis with data from 125 economies spanning 2013 to 2021. The dependent variable was the share of SWIFT flows in each reserve currency over total flows between country pairs. The main explanatory variables included among others a financial development index and legal tender status. The analysis also explored non-linear effects by interacting geopolitical proximity with measures of global geopolitical tensions, such as international military conflicts and trade policy uncertainty.
Key findings
- Geopolitical proximity impact: Closer geopolitical alignment can boost the use of alternative reserve currencies, particularly the euro and renminbi, especially among emerging market and developing economies (EMDEs).
- Non-linear effects: The impact of geopolitical proximity increases during periods of heightened international military conflicts and trade policy uncertainty. For example, the effect on euro usage increases by almost 40% following a one-standard-deviation increase in international military conflicts.
- Trade and financial linkages: Both trade and financial ties play significant roles in driving the use of major currencies. A one-percentage point increase in trade share boosts the usage of euro and US dollar by 0.08 and 0.1 percentage points respectively in the full sample, with larger impacts in EMDEs.
- Currency inertia: All five SDR currencies display a high degree of inertia in their usage, indicating that past patterns strongly influence current preferences in cross-border transactions.
- Legal tender status: This factor plays a key role in explaining cross-country variations in currency usage. The long-run effects suggest that the share of a major currency used in transactions between two countries would increase by 22–72 percentage points if it is a legal tender in one or both countries.
- Differential impacts: The effects vary across currencies. For instance, while geopolitical proximity significantly affects euro and renminbi usage, its impact on the US dollar is less clear or even negative in some specifications.
The study concludes that in a more geoeconomically fragmented world, alternative currencies could play a greater role in cross-border transactions. However, the speed of transition to such a reconfiguration remains uncertain and could be accompanied by financial volatility.
Geopolitical Alignment and the Use of Global Currencies
Authors: Jakree Koosakul, Longmei Zhang, Maryam Zia
From: IMF
