How geopolitics reshapes trade volumes but not prices
In this paper Han Qiu, Dora Xia, and James Yetman examine how geopolitical alignment influences international trade patterns using granular bilateral trade data from the 47 largest trading economies from 2016-2023. The authors used UN Comtrade six-digit Harmonized System (HS) bilateral trade statistics that include values, quantities, and prices (USD-denominated FOB) across approximately 5,000 sectors. The key findings include:
Trade values:
- Geopolitical distance consistently reduced bilateral trade growth throughout the sample period.
- Trade between geopolitical adversaries grew approximately 12 percentage points slower than between allies (2017-2023 average).
- The effect strengthened after Russia’s invasion of Ukraine, reaching a maximum gap of approximately 25 percentage points in early 2023.
Quantity vs. price effects:
- The decline in trade values was primarily driven by reduced quantities, not prices.
- Quantities showed nearly identical patterns to values (12 percentage points slower growth between adversaries vs. allies).
- Prices received by exporters remained largely unaffected (difference of only 0.2 percentage points on average). This indicates that higher costs associated with geopolitical factors (e.g., tariffs) were mostly passed on to importers rather than being absorbed by exporters.
Global phenomenon:
- Results remained robust when excluding China-US trade, indicating geopolitical fragmentation is a global phenomenon
- When treating EU as a single entity, effects were somewhat smaller but still significant, suggesting intra-EU trade partially offset some global fragmentation
The role of geopolitics in international trade
Authors: Han Qiu, Dora Xia, James Yetman
From: BIS
Trade cooperation and geopolitics
Aaditya Mattoo, Michele Ruta, and Robert W. Staiger, in this paper, build a theoretical framework to analyze how geopolitical rivalry affects trade cooperation and the global trading system. They use a two-good general equilibrium neoclassical trade model, first in a two-country world where countries are geopolitical rivals, then extending to a three-country world with two rivals and one neutral country.
They characterize Nash tariffs, identify efficient tariff combinations, and examine whether trade cooperation is possible between rivals using this framework. The key findings include:
- Nash tariffs: The rise of geopolitical rivalry increases the best-response (non-cooperative) tariff of each rival country. When tariff reaction curves are upward sloping, rivalry raises the Nash tariffs of both rivals.
- Efficiency frontier: Surprisingly, except in the extreme case where countries care only about dominating their rivals, the set of internationally efficient tariffs remains unchanged by geopolitical rivalry. This means countries that have already reached efficient tariff combinations don’t need to renegotiate to maintain efficiency.
- Continued role for trade cooperation: Unless domination becomes the sole objective of each rival, a role for mutually beneficial trade policy cooperation persists despite geopolitical tensions. Even in a geopolitical world, “enlightened self-interest” can drive trade cooperation.
- Challenges for negotiation: While the original cooperative tariffs remain efficient when geopolitics erupts, they typically will no longer be the preferred cooperative outcome. Countries must find a way to move along the efficiency frontier, which requires:
– Either a temporary unraveling of existing liberal trade policies (a path of “war and redemption”)
– Or a departure from the GATT/WTO principle of reciprocity in tariff changes
- Implications for the MFN principle: In a multilateral world, the most-favored-nation (MFN) principle creates additional challenges. Two rival countries cannot make non-discriminatory tariff adjustments that transfer surplus between them without affecting neutral third countries.
- Institutional adaptation: The WTO’s relevance may be compromised if it adheres too rigidly to its existing rules when applying them to geopolitical rivals. Measured adaptation to geopolitical realities may be necessary for continued effectiveness.
These findings suggest that trade cooperation remains possible in a world of geopolitical rivalry, but maintaining such cooperation may require flexible adaptations to the traditional rules and norms of the multilateral trading system.
Geopolitics and the World Trading System
Authors: Aaditya Mattoo, Michele Ruta, Robert W. Staiger
From: The World Bank, IMF, Dartmouth College
