Trade Fragmentation or reinforcement? Assessing the impact of geopolitical risk on inter- and intra-bloc trade flows

Abstract

Global trade patterns are increasingly shaped by the influence of geopolitical risk (GPR), which has become a persistent feature of the international economic landscape. While conventional wisdom posits that heightened GPR dampens trade flows, recent events suggest that temporary trade adjustments—such as trade diversion, supply chain reconfiguration, and preemptive stockpiling—may partially offset immediate disruptions. This paper explores the impact of GPR on international trade, drawing on quantitative analysis of panel data to examine how trade flows respond to rising geopolitical tensions. Particular attention is given to the distinction between intra-bloc and inter-bloc trade patterns. Case studies from the U.S.-China trade war illustrate how firms and states dynamically adapt supply chains to mitigate exposure to geopolitical shocks. The paper employs interaction terms to correct for unobserved heterogeneity and isolate the true effect of GPR on trade flows. The findings reveal that while short-term adjustments create an initial buffering effect—reflected in positive trade responses—these are temporary, and the underlying trend aligns with a net decline in trade volumes under sustained high GPR. Understanding these dynamics offers valuable insights for policymakers, businesses, and scholars concerned with the resilience of global supply chains and the future of international economic integration.