From integration to fragmentation: the unraveling of global trade
In this paper Elhanan Helpman examines the evolution of trade from the 19th century through 2025, with particular focus on the post-World War II trading system. He uses survey data analysis from Gallup polls and other sources to assess public attitudes toward trade across multiple time periods and trade statistics, GDP data, and employment figures to measure economic impacts.
Trade growth and development impact
Global merchandise exports expanded dramatically from 5% of GDP in the early 19th century to 25% in the 21st century. Between 1993-2018, global inequality declined primarily due to narrowing per capita income gaps between countries, facilitated by trade integration. Countries that increased exports relative to GDP after World War II experienced faster per capita income growth, with strong evidence that international knowledge flows through trade contributed to productivity improvements.
Global value chains performance
Global Value Chains (GVCs) now account for approximately 50% of global trade, remaining stable at this level since the 2007 financial crisis. Many low- and middle-income countries achieved rapid GVC participation growth between 2010-2020, with Vietnam at 13.3%, Cambodia at 11.1%, and China at 5% annually. Despite high-profile disruptions, supply chains demonstrated remarkable resilience, with businesses routinely managing disruptions averaging 42% of net annual earnings across industries.
China trade war consequences
The 2018 Trump tariffs on China were almost fully passed through to higher U.S. prices, contrary to expectations that they would reduce trade deficits. The tariffs led to trade diversion to other Asian countries but failed to meaningfully reduce the overall U.S. trade deficit, while actually reducing U.S. manufacturing employment due to higher input costs and foreign retaliation. China’s central role in global supply chains remained largely intact through indirect dependence, as countries like Vietnam expanded imports from China to manufacture products for the U.S. market.
Fragmentation costs
Various studies estimate substantial economic costs from trade fragmentation. Full decoupling between U.S. and Chinese blocs could reduce global GDP by 4.8% in the short run and 2.3% in the long run, with low-income countries facing output losses of 10.8% short-term and 4.3% long-term. Technological decoupling scenarios show China’s GDP declining by approximately 4% and the U.S. by 3% after ten years, with South Korea experiencing the largest contraction exceeding 6%.
The Future of Foreign Trade
Author: Elhanan Helpman
From: Harvard University
The real cost of protection: modeling the 2025 trade war
Andrés Rodríguez-Clare, Mauricio Ulate, and Jose P. Vasquez in this working paper analyze the effects of substantial U.S. tariff increases in 2025. The authors employ a dynamic trade model with downward wage rigidity across 50 U.S. states and 37 international regions, covering 15 sectors (home production, 12 manufacturing subsectors, services, and agriculture). The model incorporates input-output linkages, gravity-based trade flows, and a novel feature where tariff revenues are redistributed by population shares rather than collection amounts. The findings include:
Aggregate U.S. impact
- Real income decline: U.S. real income falls by approximately 1% by 2028, the final year tariffs remain active in the baseline specification. This represents a significant economic cost despite tariff revenue rebates partially offsetting the decline.
- Employment effects: Overall U.S. employment falls by approximately 1.1% relative to the pre-shock baseline. Manufacturing employment temporarily increases due to protection from imports, but this comes at the cost of declines in service and agricultural jobs. Labor force participation decreases by up to 0.65% as home production becomes more attractive relative to market sectors.
- Unemployment generation: The model predicts unemployment of around 0.5% when the shock ends in 2029, as the manufacturing sector faces downward pressure and nominal wage rigidities prevent adjustment.
- State-level heterogeneity: Real income changes across states range from an increase of 2.2% to a decrease of 3.1%, demonstrating substantial heterogeneity despite the aggregate 1% decline. States with the largest losses include Texas, California, and Michigan, while Colorado, Nebraska, and Oklahoma experience smaller losses.
- Trading partners: Close U.S. trading partners suffer the largest real income losses: Canada loses 2%, Mexico loses 2.7%, Ireland loses 3%, while China loses 0.5%. Some countries like Turkey and Great Britain experience gains due to reduced competition in export markets.
The 2025 Trade War: Dynamic Impacts Across U.S. States and the Global Economy
Authors: Andrés Rodríguez-Clare, Mauricio Ulate, Jose P. Vasquez
From: University of California, Berkeley, London School of Economics
