Horizontal and Vertical Connector Countries in a Geoeconomically Fragmenting World

Shekhar Aiyar, Franziska Ohnsorge and Hakan Yilmazkuday

No 19352, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Geoeconomic fragmentation—the phenomenon of international transactions being increasingly restricted to politically aligned partners—creates risks for individual countries but also opportunities that some hope to seize by becoming “connector†countries. We modify a standard trade model by introducing iceberg costs that increase with geopolitical distance between country pairs. The response of per capita consumption to a geopolitical shock is shown to depend on two related but distinct indices: vulnerability, which is a country’s transaction-weighted geopolitical distance from its trade partners, and connectedness, which is a country’s transaction-weighted standard deviation of geopolitical distance from trade partners. The latter captures a country’s geopolitical diversification. We distinguish between this type of “horizontal†connectedness and the supply chain-related “vertical†connectedness discussed by previous authors, arguing that the horizontal measure is more relevant in a geoeconomically fragmenting world. We construct a comprehensive database to examine geoeconomic vulnerability and connectedness across multiple types of international transactions, documenting several stylized facts.

Keywords: Foreign; direct; investment (search for similar items in EconPapers)
JEL-codes: F02 F15 F21 F41 F60 (search for similar items in EconPapers)
Date: 2024-08
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