Geopolitical Risks and Trade

Alen Mulabdic and Yoto Yotov

No 202532, Working Papers from Center for Global Policy Analysis, LeBow College of Business, Drexel University

Abstract: We study the impact of geopolitical risks on international trade. To this end, we use the Geopolitcal Risk (GPR) index of Caldara and Iacoviello (2022) and an empirical gravity model. The impact of spikes in GPR on trade is negative, strong, and heterogeneous across sectors. Specifically, we find that increases in geopolitical risk reduce trade by about 30-40%. These effects are equivalent to a global tariff increase of up to 14%. Services trade is most vulnerable to geopolitical risks, followed by agriculture, while the impact on manufacturing trade is moderate. These negative effects are partially mitigated by cultural and geographic proximity, as well as by the presence of trade agreements.

Keywords: Geopolitical Risks; International Trade; Structural Gravity (search for similar items in EconPapers)
JEL-codes: F13 F14 F16 F51 F52 H56 (search for similar items in EconPapers)
Pages: 25
Date: 2025-08
New Economics Papers: this item is included in nep-geo and nep-rmg
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Working Paper: Geopolitical Risks and Trade (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:drx:wpaper:202532

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