Geopolitical Risks and Trade

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.