Business as Usual? Heterogeneous Impact of Geopolitics on International Trade

ABSTRACT

Motivated by current geopolitical developments, we test the impact of international tensions on trade flows. Specifically, we address this issue with a novel gravity‐based method that applies an asymmetric version of the Poisson Pseudo‐Maximum‐Likelihood (PPML) estimator to uncover heterogeneous effects at different expectiles. As a result, we can summarise the conditional distribution of trade‐related dependent variables based on their regressors, similar to quantiles. We find no effect of geopolitical distance on global value chain (GVC)‐induced trade (i.e., trade in intermediate goods that are further processed within GVCs), whereas there is a negative effect on trade in final goods, but only for country pairs with low expectiles of trade distributions. These results suggest a predominantly ‘business‐as‐usual’ response of trade to international tensions. We also observe heterogeneity in the effects of regional integration on trade flows.