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Horizontal and Vertical Connector Countries in a Geoeconomically Fragmenting World

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  • Shekhar Aiyar

    (Indian Council for Research on International Economic Relations (ICRIER))

  • Franziska Ohnsorge

  • Hakan Yilmazkuday

Abstract

Geoeconomic fragmentation—the phenomenon of international transactions being increasingly restricted to politically aligned partners-creates risks for individual countries but also opportunities that some hope to seize by becoming "connector" countries. We modify a standard trade model by introducing iceberg costs that increase with geopolitical distance between country pairs. The response of per capita consumption to a geopolitical shock is shown to depend on two related but distinct indices: vulnerability, which is a country's transaction-weighted geopolitical distance from its trade partners, and connectedness, which is a country's transaction-weighted standard deviation of geopolitical distance from trade partners. The latter captures a country's geopolitical diversification. We distinguish between this type of "horizontal" connectedness and the supply chain-related "vertical" connectedness discussed by previous authors, arguing that the horizontal measure is more relevant in a geoeconomically fragmenting world. We construct a comprehensive database to examine geoeconomic vulnerability and connectedness across multiple types of international transactions, documenting several stylized facts.

Suggested Citation

  • Shekhar Aiyar & Franziska Ohnsorge & Hakan Yilmazkuday, 2026. "Horizontal and Vertical Connector Countries in a Geoeconomically Fragmenting World," Indian Council for Research on International Economic Relations (ICRIER) Working Paper 430, Indian Council for Research on International Economic Relations (ICRIER), New Delhi, India.
    • Handle: RePEc:bdc:wpaper:430
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