The End of Globalization? Exploring the Drivers and Effects of Geopolitical Fragmentation
Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)
- Chair: Linda Goldberg, Federal Reserve Bank of New York
The Economic Costs of Supply Chain Decoupling
AbstractAs countries and firms struggle to increase the resilience of their supply chains, this paper looks at the global economic costs of supply chains decoupling using the Baqaee and Farhi (2023) multi-country and multi-sector model. In line with the most recent literature, we look into a decoupling of global supply chains along geopolitical lines as well as in strategic sectors. The rich model setup allows us to explore not only the long-run effects, but also the short-run costs stemming from rigid wages and low substitutability for factors of production and input goods. We find that, in terms of welfare losses, the costs of decoupling are roughly 5 times higher in the short-run compared to the long-run, while country losses are heterogeneous. A reshaping of supply chains increases the level of consumer prices in most countries, as well as producer prices, especially for trade-intensive manufacturing sectors. Supply chain decoupling entails also a reallocation of labour across skill levels between the two blocs. Finally, global trade would decrease substantially, driven by lower trade in intermediate inputs and a higher reliance of countries on domestic production.
Investing in Friends: The Role of Geopolitical Alignment in FDI Flows
AbstractFirms and policy makers are increasingly looking at friend-shoring and reshoring to make supply chains more resilient and less vulnerable to geopolitical tensions. To test whether these considerations are shaping FDI flows, we use investment-level data on almost 300,000 greenfield FDI between 2003 and 2022. We show that cross border direct investments are increasingly concentrated among countries which are geopolitically aligned. Estimates from a gravity model, which controls for standard push and pull factors, show that the role of geopolitical alignment in driving the geographical footprint of bilateral FDI is economically relevant, robust to the inclusion of standard bilaterals drivers of FDI—such as geographic distance—and has increased since 2018, with the resurgence of trade tensions between the U.S. and China.
Divided We Fall: Differential Exposure to Geopolitical Fragmentation in Trade
AbstractThis paper assesses differences in macroeconomic exposure to trade fragmentation along geopolitical lines across a large group of countries. 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). As a result, 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 60 percent larger, and for the median EMDE in Africa 100 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.
- F1 - Trade
- F6 - Economic Impacts of Globalization