Geopolitical distance and international trade (OeNB Bulletin Q2/25)

Recently, the relationship between geopolitical distance and international trade has gained increasing attention, as rising protectionism in large economies is changing trade patterns and is introducing new barriers to economic exchange. While classical trade theories emphasize the importance of economic fundamentals, such as comparative advantage and factor endowments, in shaping trade patterns, emerging research highlights the role of non-economic factors, including political relations. Using a standard gravity model of trade, we estimate the importance of geopolitical distance, as measured by the ideal point distance calculated by Bailey et al. (2017) based on differences in voting patterns at the UN General Assembly. Results suggest that differences in geopolitical alignment are detrimental to trade, especially so in the last decade. This finding is of particular relevance for emerging economies. Moreover, we find that imports by countries which are geopolitically closely aligned with the US appear to be most sensitive to increases in geopolitical distance.