Geoeconomic fragmentation of trade : empirical evidence and welfare effects.

Details

Supervisors

Trimarchi, Lorenzo

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale, à finalité spécialisée

Abstract

enThis thesis investigates the relationship between geopolitics and international trade and examines the potential trade and welfare consequences of geopolitical shocks. Using a gravity model with the Ideal Point Distance (IPD) (Bailey et al. (2017)) as a measure of bilateral geopolitical distance, this thesis shows that higher geopolitical distance is associated with lower bilateral trade, with a one-unit increase in geopolitical distance associated with an approximately 14 percent decrease in trade. Furthermore, the analysis provides evidence that the association between geopolitical distance and trade flows has strengthened in the last decade. To assess the economic consequences of geopolitical shocks, the thesis employs a simple Armington framework to simulate counterfactual increases in geopolitical distance between the European Union and the United States, and between the European Union and China. The results indicate negative welfare effects for affected economies. These costs are distributed unevenly across EU member states, with small open economies and countries with greater exposure to trade with the United States and China facing comparatively larger losses. By combining empirical estimates of the relationship between geopolitical distance and trade with general equilibrium counterfactual simulations, this thesis contributes to the growing literature on geoeconomic fragmentation by providing both evidence of the increasing role of geopolitical distance in international trade and an assessment of its potential economic costs.