Geopolitical Risk and International Trade: Examining the Economic Consequences of Strategic Rivalries and Supply Chain Disruptions

Abstract

The post-Cold War era of hyper-globalization, characterized by aggressive tariff reductions and the expansion of specialized Global Value Chains (GVCs), has increasingly yielded to a regime of geoeconomic fragmentation where international trade is recalibrated by national security priorities and strategic rivalries. This review article provides a comprehensive evaluation of the economic consequences of geopolitical risk, strategic rivalries, and supply chain disruptions on the global economy. Synthesizing empirical methodologies, structural macro-econometric models, and sectoral analyses, the study traces multi-layered transmission mechanisms through which geopolitical shocks propagate across borders. The analysis examines how elevated geopolitical risk alters capital allocations, induces structural lengthening in supply chain networks, drives quantity rationing in essential commodities, and imposes substantial welfare costs on both advanced and emerging market economies. Drawing on quantitative metrics including the Geopolitical Risk Index and historical Shortage Indexes, the review demonstrates that geopolitical shocks exhibit critical state-dependent asymmetries: energy-related shocks produce stagflationary outcomes while non-energy shocks operate primarily through confidence and financial channels. Empirical gravity model estimations reveal heterogeneous impacts of different forms of state-level hostility on trade flows, with kinetic conflict and economic coercion causing persistent trade reductions. The findings indicate that severe geoeconomic fragmentation could reduce global GDP by 7.0 to 12.0 percent, with emerging economies suffering disproportionately greater welfare contractions. The paper concludes by examining supply chain restructuring trends including reshoring, nearshoring, and friend-shoring, alongside sectoral vulnerabilities and the erosion of multilateral trade governance, while proposing pathways toward re-globalization through open plurilateral agreements and institutional guardrails.