Changing Global Linkages: A New Cold War?Gita Gopinath, Pierre-Olivier Gourinchas, Andrea F. Presbitero, and Petia TopalovaWP/24/76IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2024 APR Changing Global Linkages: A New Cold War?*Gita Gopinath, Pierre-Olivier Gourinchas, Andrea F. Presbitero, and Petia TopalovaApril 2024AbstractGlobal linkages are changing amidst elevated geopolitical tensions and a surge in policies di-rected at increasing supply chain resilience and national security. Using granular bilateral data,this paper provides new evidence of trade and investment fragmentation along geopoliticallines since Russia’s invasion of Ukraine, and compares it to the historical experience of theearly years of the Cold War. Gravity model estimates point to significant declines in tradeand FDI flows between countries in geopolitically distant blocs since the onset of the war inUkraine, relative to flows between countries in the same bloc (roughly 12% and 20%, respec-tively). While the extent of fragmentation is still relatively small and we do not know howlonglasting it will be, the decoupling between the rival geopolitical blocs during the Cold Warsuggests it could worsen considerably should geopolitical tensions persist and trade restrictivepolicies intensify. Different from the early years of the Cold War, a set of nonaligned ‘con-nector’ countries are rapidly gaining importance and serving as a bridge between blocs. Theemergence of connectors has likely brought resilience to global trade and activity, but does notnecessarily increase diversification, strengthen supply chains, or lessen strategic dependence.JEL Classification:F14, F60, I18Keywords:Trade; Foreign direct investment; Geoeconomics; Fragmentation*Authors’ contacts: Gita Gopinath, International Monetary Fund, e-mail: ggopinath@imf.org; Pierre-Olivier Gour-inchas, International Monetary Fund and CEPR, e-mail: pgourinchas@imf.org; Andrea F. Presbitero, International Mon-etary Fund and CEPR, e-mail: apresbitero@imf.org; Petia Topalova, International Monetary Fund and CEPR, e-mail:ptopalova@imf.org. Shan Chen and Mona Wang provided excellent research assistance. We thank numerous colleaguesand participants at the 2023 Asia Economic Policy Conference and the 2024 AEA Conference for helpful comments andsuggestions. The views expressed here are those of the authors and should not be attributed to the International Mon-etary Fund, its Executive Board, or its management. 1 IntroductionOver the past decade, the future of global economic integration has been increasingly challenged.Disillusionment with the uneven benefits of trade, fragility of highly specialized global supplychains exposed by the COVID-19 pandemic, and geopolitical frictions heightened by the war inUkraine are all contributing to rethinking commitments to free trade. In 2015, the Chinese govern-ment announced the ‘Made in China 2025’ initiative, with the goal of upgrading its manufactur-ing industry, reducing its reliance on foreign technology, and raising the domestic content of corecomponents and materials to 70 percent by 2025. In 2018, the U.S. raised tariffs on a wide rangeof imports from China. Policy measures by advanced and emerging market economies, whichdirectly or indirectly restrict trade flows, have surged.1Yet, despite these changes in the policyenvironment and public sentiment, there are no signs of significant changes in the extent of glob-alization, crudely defined as the ratio of global trade to GDP. Since around the time of the globalfinancial crisis, when the 2000s hyperglobalization came to an end, the ratio of goods trade to GDPhas fluctuated between 41 and 48 percent (Figure 1, Panel A). Foreign direct investment (FDI) hasbecome more subdued: global FDI as a share of GDP has declined from around 3.4 before theglobal financial crisis to 2.5 percent thereafter.2A number of studies have argued that underneath the relatively stable aggregate trends, a redi-rection of trade and investment flows across countries is taking place, potentially a symptom offragmentation (Aiyaret al., 2023a; Freundet al., 2023; Alfaro and Chor, 2023; Blanga-Gubbay andRubínová, 2023; World Trade Organization, 2023). The newly popular term, “geoeconomic frag-mentation” refers to policy-induced changes in the sources and destinations of cross-border flows,often guided by strategic considerations, such as national and economic security, sovereignty, au-tonomy, which may or may not be associated with a decline in world trade relative to GDP. Thisterm, along with “reshoring,” “nearshoring” and “friend-shoring” is increasingly mentioned incompanies’ earnings calls (Figure A1, Panel B). And there is by now robust evidence that the t