European Central Bank - eurosystem
Search Options
Home Media Explainers Research & Publications Statistics Monetary Policy The €uro Payments & Markets Careers
Sort by

Lukas Boeckelmann

29 March 2023
Economic Bulletin Issue 2, 2023
This box presents a stylised, model-based, general equilibrium assessment of the global economic effects of trade fragmentation. The focus is on a rather extreme scenario in which two hypothetical geopolitical blocs raise barriers to trade in intermediate goods, causing a relocation of supply chains to countries within the same bloc (“friend-shoring”). Using a model developed by Baqaee and Farhi, we find that economic losses (in terms of welfare, trade and prices) can be sizeable, depending on the degree of rigidities embedded in the model. Effects are also heterogeneous across countries, as small, open economies that are reliant on global value chains are more affected. The findings in this box suggest that trade fragmentation would be a lose-lose situation for all parties involved and leave the global economy more vulnerable to shocks.
JEL Code
F12 : International Economics→Trade→Models of Trade with Imperfect Competition and Scale Economies, Fragmentation
F13 : International Economics→Trade→Trade Policy, International Trade Organizations
O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes