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This paper assesses differences in countries’ macroeconomic exposure to trade fragmentation along geopolitical lines. Estimating structural gravity regressions for sector-level bilateral trade flows between 185 countries, we find that differences in individual countries’ geopolitical ties act as a barrier to trade, with the largest effects concentrated in a few sectors (notably, food and high-end manufacturing). Consequently, countries’ exposure via trade to geopolitical shifts varies with their market size, comparative advantage, and foreign policy alignments. Introducing our estimates into a dynamic many-country, many-sector quantitative trade model, we show that geoeconomic fragmentation—modelled as an increased sensitivity of trade costs to geopolitics and greater geopolitical polarization—generally leads to lower trade and incomes. However, emerging markets and developing economies (EMDEs) tend to see the largest impacts: real per-capita income losses for the median EMDE in Asia are 80 percent larger, and for the median EMDE in Africa 120 percent larger, than for the median advanced economy. This suggests that the costs of trade fragmentation could fall disproportionally on countries that can afford it the least.

Aggregate Factor Income Distribution --- Balance of trade --- Commercial policy --- Commercial treaties --- Currency crises --- Economic & financial crises & disasters --- Economic Integration --- Economics of specific sectors --- Economics --- Economics: General --- Empirical Studies of Trade --- Exports and Imports --- Income --- Informal sector --- International Agreements and Observance --- International Conflicts --- International economics --- International Organizations --- International Policy Coordination and Transmission --- International Trade Organizations --- International trade --- Macroeconomic Aspects of International Trade and Finance: General --- Macroeconomics --- National accounts --- Negotiations --- Plurilateral trade --- Sanctions --- Trade agreements --- Trade balance --- Trade barriers --- Trade Policy --- Trade: Forecasting and Simulation

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After several decades of increasing global economic integration, the world is facing the risk of policy-driven geoeconomic fragmentation (GEF). This note explores the ramifications. It identifies multiple channels through which the benefits of globalization were earlier transmitted, and along which, conversely, the costs of GEF are likely to fall, including trade, migration, capital flows, technology diffusion and the provision of global public goods. It explores the consequences of GEF for the international monetary system and the global financial safety net. Finally, it suggests a pragmatic path forward for preserving the benefits of global integration and multilateralism.

Capital movements. --- Monetary policy. --- Balance of payments --- Capital movements --- Commercial policy --- Currency crises --- Economic & financial crises & disasters --- Economic Development: General --- Economic Integration --- Economic sectors --- Economics of specific sectors --- Economics --- Economics: General --- Exports and Imports --- Financial crises --- Financial Risk Management --- Foreign Exchange --- General issues --- Globalization --- Globalization: General --- Government and the Monetary System --- Informal Economy --- Informal sector --- Innovation --- Intellectual Property Rights: General --- International Economic Order and Integration --- International economics --- International Factor Movements and International Business: General --- International finance --- International Finance: General --- International Fiscal Issues --- International Investment --- International Monetary Arrangements and Institutions --- International Policy Coordination and Transmission --- International Public Goods --- International Trade Organizations --- International trade --- Long-term Capital Movements --- Macroeconomics --- Monetary economics --- Monetary Systems --- Money and Monetary Policy --- Money --- Natural Resources and Domestic and International Conflicts --- Payment Systems --- Policy Coordination --- Policy Designs and Consistency --- Policy Objectives --- Regimes --- Research and Development --- Standards --- Technological Change --- Technology --- Trade Policy --- Trade: General --- Underground Econom --- United States