RESEARCH AND ANALYSIS: WORKING PAPERS
Is the Global Economy Fragmenting?
Using monthly data on trade in goods between January 2016 and May 2023, this study assesses the impact of recent shocks on the fragmentation of the global economy, looking in particular at the dynamics of friend-shoring, near-shoring and decoupling between the world’s two largest economies. Results based on gravity model regressions with high-dimensional fixed effects show that trade flows have become more sensitive to geopolitical distance since the start of the war in Ukraine, leading to the first signs of overall trade fragmentation along geopolitical lines, i.e. friend-shoring.
Trade in goods between hypothetical East and West blocs has grown 4 per cent slower than intra-bloc trade since the start of the war. On the other hand, we find no evidence of an increased regionalisation of world trade since the shock of the COVID-19 pandemic or the war in Ukraine. Therefore, our results suggest that near-shoring strategies did not have a large impact on world trade. Finally, our results confirm that the increased trade tensions between the world’s two largest economies have significantly reduced their bilateral trade, a trend that has been exacerbated by the geopolitical tensions and uncertainty created by the war in Ukraine.
Staff Working Paper: Research ERSD-2023-10
Authors: Michael Blanga-Gubbay, Stela Rubínová
Manuscript date: 30 November 2023
Key Words:
global trade outlook, empirical studies of trade, fragmentation, decoupling
JEL classification numbers:
F01, F14, F52
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This is a working paper, and hence it represents research in progress. The opinions expressed in this paper are those of its author. They are not intended to represent the positions or opinions of the WTO or its members and are without prejudice to members' rights and obligations under the WTO. Any errors are attributable to the author.
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