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Geopolitical Risks and Trade

Author

Listed:
  • Alen Mulabdic

    (World Bank)

  • Yoto Yotov

    (School of Economics, Drexel University)

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.

Suggested Citation

  • Alen Mulabdic & Yoto Yotov, 2025. "Geopolitical Risks and Trade," Working Papers 202532, Center for Global Policy Analysis, LeBow College of Business, Drexel University.
    • Handle: RePEc:drx:wpaper:202532
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    File URL: https://www.lebow.drexel.edu/sites/default/files/2025-08/cgpa_paper_2025_32.pdf
    File Function: First version, 2025
    Download Restriction: no
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    More about this item

    Keywords

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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • F52 - International Economics - - International Relations, National Security, and International Political Economy - - - National Security; Economic Nationalism
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

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