International trade and economic growth in the era of geoeconomic fragmentation

Abstract

This paper studies the relationship between international trade and economic growth during the era of geoeconomic fragmentation (2017–2023), using a simultaneous equations model estimated through the full information maximum likelihood method. The study covers 132 countries (30 advanced and 102 developing) and also analyzes trade-growth dynamics separately for large and small economies. The findings confirm that trade remains a crucial factor for economic growth, but it acts more as a facilitator than a direct driver. In advanced countries, exports positively contribute to capital formation and growth, and industrialization contributes significantly to exports, while capital inflows have a negative effect on fixed capital formation. For developing countries, industrialization significantly boosts exports and in turn economic growth. The study highlights that the rise in protectionism and trade disruptions during the geoeconomic fragmentation period may weaken the positive impact of trade on growth. The results are validated through dynamic simulations, underscoring the need for strategic industrialization and trade partnerships to sustain growth in a fragmented global economy.