Geoeconomic Fragmentation and "?Connector"? Countries

Abstract

Geoeconomic fragmentation ?the phenomenon of international transactions being increasingly restricted to politically aligned partners ?creates risks for individual countries but also opportunities that some hope to seize by becoming ?connector ? countries. We formalize the concept of connectedness as the property of transacting with international partners drawn from across the ideological spectrum, and explore various policy correlates of connectedness. We show that more open and financially developed countries tend to be the ones that are more connected. Higher tariffs (including those used for industrial policy) are associated with less connectedness. Using a new database of geoeconomic vulnerabilities and geoeconomic connectedness for trade and financial transactions, we document that rising fragmentation since 2016 has been accompanied by broad-based cutbacks in both vulnerability and connectedness, especially in exports and FDI. The largest cutbacks have occurred in countries that were initially the most vulnerable.