Changing global linkages: A new Cold War?

Abstract

Global linkages are changing amidst elevated geopolitical tensions and a surge in policies directed at increasing supply chain resilience and national security. Using granular bilateral data, we provide new evidence of trade and investment fragmentation along geopolitical lines and compare it to the early years of the Cold War. Gravity model estimates point to significant declines in trade, FDI, and portfolio flows between countries in geopolitically distant blocs since the onset of the war in Ukraine, relative to flows between countries in the same bloc. While the extent of fragmentation is still relatively small, the decoupling between the rival geopolitical blocs during the Cold War suggests it could worsen considerably should geopolitical tensions persist and trade restrictive policies intensify. Different from the early years of the Cold War, a set of nonaligned ‘connector’ countries are rapidly gaining importance and serving as a bridge between blocs.