The Fragmentation Paradox: De-Risking Trade and Global Safety

Thierry Mayer, Isabelle Mejean and Mathias Thoenig

No 20564, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a model of international trade and geopolitical disputes, embedding a diplomatic game of escalation to conflict within a quantitative model of trade. Bilateral disputes arise exogenously, and rival countries engage in negotiations to avoid war. In equilibrium, all welfare-relevant geoeconomic factors — such as the realized costs of war, the concessions required to avert it, and the probability of deescalation — depend on the opportunity cost of war, itself shaped by observed trade flows. We provide a simple procedure to estimate these factors in a model of trade calibrated to current data. This approach is then used to quantify the geoeconomic factors characterizing the US-China relationship, both historically and under prospective "decoupling" scenarios. We find that the growing U.S. dependence to Chinese products over the past thirty years has increased the cost of geopolitical disputes with China for the US. In this context, decoupling from China through increased tariffs may offer geopolitical benefits. Yet, the analysis highlights a fundamental security dilemma: because trade dependencies influence bargaining power in negotiations, decoupling reduces the diplomatic concessions needed to maintain peace but can paradoxically raise the risk of escalation by weakening incentives for restraint. Overall, this quantitative framework offers a structured tool to guide policy decisions on the optimal degree of decoupling.

Keywords: International; trade (search for similar items in EconPapers)
JEL-codes: F1 F5 (search for similar items in EconPapers)
Date: 2025-08
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