Geopolitical Barriers to Globalization

Tianyu Fan, Mai Wo and Wei Xiang

Papers from arXiv.org

Abstract: This paper estimates and quantifies how geopolitical alignment shapes global trade across three distinct eras: the Cold War, hyper-globalization, and contemporary fragmentation. We construct a novel measure of bilateral alignment using large language models to compile and analyze 833,485 political events spanning 193 countries from 1950 to 2024. Our analysis reveals that trade flows systematically track geopolitical alignment in both bilateral relationships and aggregate patterns. Using local projections within a gravity framework, we estimate that a one-standard-deviation improvement in geopolitical alignment increases bilateral trade by 20 percent over ten years. Integrating these elasticities into a quantitative general equilibrium model, we find that deteriorating geopolitical relations have reduced global trade by 7 percentage points between 1995 and 2020. Our findings provide empirical benchmarks for evaluating the costs of geopolitical fragmentation in an era of renewed great power competition.

Date: 2025-09, Revised 2025-09
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