Trade fragmentation reduces global welfare, creates winners and losers
A Banque de France working paper by Charles Serfaty and Sebastian Stumpner analyzes the welfare impacts of geoeconomic fragmentation. The study finds that trade decoupling reduces global welfare but creates both winners and losers, with neutral countries often gaining.
Global value chains amplify fragmentation costs
The Banque de France paper quantifies the impact of trade fragmentation into rival blocs using a detailed multi-country, multi-sector model calibrated to OECD input-output data.
The model captures global value chains, where trade disruptions cascade across sectors due to intermediate inputs.
Under all fragmentation scenarios, world trade and global welfare decline.
Losses are substantially larger when decoupling occurs through higher non-tariff trade costs than through tariffs, as tariffs generate revenue that partly compensates domestic consumers.
If inter-bloc trade becomes fully prohibitive, global real consumption falls by about 0.8 percent, a significant reversal of decades of integration gains.
This highlights how moderate fragmentation can erase a meaningful share of global gains from trade.
Neutral economies gain as blocs face instability
A benchmark scenario with a 20 percent rise in inter-bloc trade costs illustrates the distributional patterns.
Western and Eastern bloc members typically experience welfare losses between 0.1 and 0.8 percent.
China and Russia face larger declines due to narrower trade networks.
In contrast, neutral economies like Vietnam or Mexico often gain by attracting production and supply-chain re-routing.
The paper also analyzes the strategic logic of tariff wars, showing that while a unilateral tariff can improve welfare, retaliation is a best response.
This leads to a prisoner's dilemma where both blocs end up worse off than under free trade, making blocs intrinsically fragile.
Size matters in the new geopolitical chess
The study convincingly shows that bloc size is a decisive factor in shaping the future architecture of global trade.
The Western bloc's initial economic advantage allows it to progressively attract all neutral economies, even through multiple expansion rounds.
This highlights a critical, often overlooked, dynamic in the ongoing geoeconomic reordering, where economic gravity ultimately dictates alignment.