Measuring Geopolitical Fragmentation: Implications for Trade, Financial Flows, and Economic Policy

Abstract

Recent geopolitical tensions have revived interest in understanding the economic consequences of geopolitical fragmentation. Using bilateral trade flows, portfolio investment data, and detailed records of economic policy interventions, we revisit widely used geopolitical distance metrics, specifically the ideal point distance (IPD) derived from United Nations General Assembly voting. We document substantial variability in measured fragmentation, driven significantly by methodological choices related to sample periods and vote categories, especially in the wake of Russia’s 2022 invasion of Ukraine. Our results show robust evidence of increasing fragmentation in both trade flows and economic policy interventions among geopolitically distant country pairs, with particularly strong effects observed in strategically important sectors and policy motives. In contrast, financial portfolio allocations exhibit weaker, more heterogeneous, and context-sensitive responses. These findings highlight the critical importance of methodological transparency and careful specification when assessing geopolitical realignments and their implications for international economic relations.

Introduction

Over the past decade, the trajectory of global economic integration has come under intense scrutiny due to heightened geopolitical tensions, increasing emphasis on national security, and a proliferation of policies explicitly aimed at reshaping global supply chains. While traditional indicators, such as the ratio of global trade to GDP, have suggested resilience, closer scrutiny of bilateral trade and financial flows reveals emerging patterns of fragmentation aligned with geopolitical considerations (Aiyar et al., 2023, Gopinath et al., 2025). Rising geopolitical tensions—notably exemplified by Russia’s invasion of Ukraine in 2022, intensified trade disputes between the United States and China, and ongoing shifts toward protectionism—have triggered substantial re-allocations in both trade and financial linkages. Concurrently, policymakers have increasingly used economic policy interventions, such as tariffs, subsidies, and export controls, to strategically reshape economic relationships, directly influencing fragmentation patterns. These developments have renewed interest in understanding the precise dynamics of geopolitical fragmentation and its broader economic consequences, particularly the role of deliberate economic policy choices.

A rapidly expanding literature quantifies geopolitical fragmentation by identifying alignment blocs based on countries’ voting behaviors in international institutions, particularly the United Nations General Assembly (UNGA). The seminal contribution by Bailey, Strezhnev, and Voeten (2017) introduced a spatial voting model to estimate countries’ ideal points on a geopolitical spectrum, leading to the widely adopted ideal point distance (IPD). This metric has since been integral to analyses exploring the economic impacts of political alignment, documenting negative associations between geopolitical distance and cross-border trade, foreign direct investment (FDI), and financial asset flows (Aiyar et al., 2023; Aiyar, Presbitero, and Ruta, 2023; Blanga-Gubbay and Rubínová, 2023; Catalan, Fendoglu, and Tsuruga, 2024).

Building on the IPD, in this article we develop a new measure—seg—that captures each country’s relative geopolitical alignment between the U.S. and China. This normalized score provides a continuous, interpretable indicator of alignment and allows us to track recent shifts in global alliances. Recent studies also emphasize how escalating U.S.–China tensions and the geopolitical fallout from Russia’s invasion of Ukraine have exacerbated fragmentation trends (Jakubik and Ruta, 2023; Campos, Freund, and Ruta, 2024; Qiu, Shin, and Zhang, 2023). Yet, despite these insights, significant uncertainty remains regarding how sensitive conclusions about fragmentation are to methodological choices in constructing IPD measures. Recent contributions have proposed alternative measures of geopolitical fragmentation (e.g., Fernández-Villaverde, Mineyama, and Song, 2024) and quantified the heterogeneous effects of fragmentation on trade using foreign policy alignment data (Hakobyan, Meleshchuk, and Zymek, 2024), highlighting the need for systematic, alignment-based measures like those we develop here.