Trade dynamics under geopolitical risk Discussion paper 03/2025: Makram Khalil, David Osten, Felix Strobel
Non-technical summary
Research Question
In recent years, geopolitical tensions and associated risks have risen around the world. Global geopolitical risk surged after the Russian invasion of Ukraine. At that time, geopolitical risk spiked particularly for Russia and its neighbouring countries. In addition, geopolitical risk rose sharply in China and Taiwan in recent years, due to the geopolitical rivalry between the US and China and mounting tensions around the political status of Taiwan. As some of these countries are important exporters in the global trade and production network, the question arises to which extent rising geopolitical tensions disrupt trade flows.
Contribution
In this paper, we use detailed customs data in a panel spanning 20 years to investigate the role of the import channel for the transmission of geopolitical risk in trading partner countries. Particularly, we take the perspectives of the US and the euro area and study the effects of trading-partner geopolitical risk on import volumes and import prices.
Results
We find that trading-partner geopolitical risk shocks lower import volumes and raise import prices. The decline in imports is particularly strong when geopolitical risk shocks hit countries that exhibit a greater geopolitical distance to the US and the euro area, or when geopolitical risk shocks hit countries that are under US sanctions. Thus, increasing geopolitical risk triggers dynamics that may be conducive to a fragmentation of global trade. A case in point are large effects of geopolitical risk shocks in China. We find that US and euro area imports from non-Chinese trading partners are also affected by such shocks, which also owes to US dollar and global oil price movements as well as trading-partner value chain linkages with China.
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