The Impact of Geopolitical Risk on Trade Costs

This paper investigates the impact of geopolitical risk on trade costs across 43 countries from 1995 to 2019. The results show that geopolitical risk enters trade costs regressions positively and significantly. These findings are robust to the consideration of the different sub-periods, the sub-samples ex US and countries with the highest geopolitical risk, more control variables, the alternative estimation method, and the endogeneity issue. Given the importance of trade costs for welfare gains from trade, our results suggest a potential role for policy reforms that aim to reduce the geopolitical risk across the countries.