Changing Global Linkages: Bridging Geopolitical Fragments

The recent surge in geopolitical tensions and trade restrictions raises important questions about the global allocation of production, investment, and trade across countries. Using bilateral sectoral data on FDI, trade, and trade distortive measures over the past decade, we show that countries have responded to trade restrictions imposed on their exports by moving production to third countries whose exports face few import restrictions from their trading partners. Our findings show that FDI flows are fragmenting along geopolitical lines but are also responding to trade restrictions by relocating to countries that can serve as producers and “connectors.”