Geoeconomic Fragmentation in a Multi-Country GVC Model

This paper analyzes the welfare impacts of trade decoupling in a multi-sector general equilibrium trade model with global value chains. We show that decoupling leads to a fall in world trade and world welfare, and that losses are larger if fragmentation arises via trade costs than if it arises via tariffs. Decoupling creates both winners and losers, with neutral countries typically gaining from fragmentation. This makes blocs unstable, as bloc members have an incentive to take a neutral stance. In a final exercise, we therefore ask which bloc neutral countries would choose if forced to choose one. Here the Western bloc has a natural advantage due to its size, and it can expand in several rounds