Understanding Trade Fragmentation

December 12, 2025

Understanding Trade Fragmentation

Florencia Airaudo, François de Soyres, Ece Fisgin, Alexandre Gaillard, Ana Maria Santacreu, Keith Richards, and Henry Young¹

A large empirical literature, including Gopinath et al. (2025), finds that geopolitical distance has become an increasingly important determinant of bilateral trade flows. This work has fueled debate about the consequences of fragmentation and the extent to which global value chains are being reshaped.

Yet, most analyses and simulations of fragmentation rely on stylized assumptions. Countries are grouped into blocks, with trade within blocks favored over trade across blocks, with sometimes "connector countries" creating a link between blocks. Fragmentation is often modeled symmetrically, affecting exports and imports alike, and uniformly across products.

In this note, we provide evidence that fragmentation is neither symmetric nor uniform. First, China-the world's largest exporter, accounting for about 15 percent of global exports-does not fit the standard fragmentation narrative. Its export penetration continues to rise even in geopolitically distant markets, while its imports from these same markets decline, leading to growing trade imbalances. Second, we show that the effect of geopolitical distance on trade varies sharply by the technology intensity of the goods being traded: high-tech goods are more sensitive to geopolitics than low-tech goods. The next two sections of the note discuss these findings in detail, and the third section concludes with implications for rethinking trade fragmentation scenarios.

1. China's Asymmetric Role in Fragmentation

A natural starting point for assessing fragmentation is the relationship between trade and geopolitical distance. Following the literature (Bailey et al. 2017; Airaudo et al. 2025), we measure distance using divergence in UN General Assembly voting patterns.

Figure 1 shows rolling-window estimates of the effect of geopolitical distance on bilateral trade across a panel of 45 countries covering about 85 percent of world GDP.² When all countries in our sample are included, greater geopolitical distance is not associated with lower trade flows through most of the time period considered, and the relationship becomes more negative only after Russia's invasion of Ukraine. At first glance, this suggests that geopolitics has only recently begun to influence trade patterns.

However, excluding China from our sample reveals a different general story. The sensitivity of trade to geopolitical distance becomes stronger and statistically significant as early as the mid-2000s. This finding indicates that while many countries were already realigning trade toward geopolitically closer trading partners, China maintained broad-based commercial ties even with geopolitically distant economies, thereby masking the broader trend toward geopolitical sorting.

Importantly, this asymmetry is distinct from the concept of "connector" countries highlighted in other studies, which typically emphasizes countries, such as Vietnam or Mexico, that increasingly link otherwise distant trading partners. Here, the interesting feature is not China's role as a hub, but the asymmetric response: most countries adjusted trade toward geopolitically closer partners, while China continued to expand exports broadly across trading partners, masking the overall pattern based on geopolitical distance. China's asymmetric behavior is also evident in data on trade penetration. Since 2018, Chinese authorities have stressed the goal of greater self-reliance. As discussed in de Soyres and Moore (2024), China has reduced reliance on imported inputs while deepening dependence on foreign demand to absorb manufacturing output. This asymmetry partly reflects the evolving structure of China's trade basket, as documented in de Soyres et al. (2025), which shows that China has shifted toward exporting in sectors that advanced economies tend to import, while its own import demand has become less aligned with the export strengths of advanced economies.

Figure 2 shows that, over the past decade, advanced economies' imports from China (as a share of their GDP) have increased in the E.U., the U.K., and Canada, though declined in the U.S. Meanwhile, China's imports from advanced economies (as a share of Chinese GDP) have fallen sharply. This asymmetry has widened bilateral imbalances with China and remains central to ongoing trade policy debates.

China's dominant role in critical minerals further illustrates the selective nature of fragmentation. As shown in Figure 3, China accounts for more than 90 percent of global rare earth processing capacity and holds large shares in refining other strategic materials essential to advanced manufacturing and defense industries. In recent years, China has introduced export controls on key inputs: In July 2023 it announced licensing requirements for gallium and germanium; in October 2023 it required export permits for certain graphite products; in September 2024 it imposed export limits on antimony and related elements; and in October 2025 it rolled out tighter restrictions on certain rare earths and related technologies (including magnet/battery material chains) in the name of national security.

2. Sectoral Heterogeneity in Fragmentation

Fragmentation also varies across sectors. In Figure 4, we build on earlier work to examine how geopolitical distance affects trade flows separately for high- and low-technology goods (Airaudo et al., 2025). Using a standard gravity specification and a rolling window, we find that trade in high-tech goods is more sensitive to geopolitical distance than trade in low-tech goods, with a more pronounced difference in sensitivity across the two groups in recent years.

This result is robust across alternative specifications, including different sets of fixed effects and bilateral gravity variables. It suggests that fragmentation pressures have been concentrated in high-tech sectors, where trade relationships are increasingly shaped by strategic and security considerations.

This finding contrasts with earlier results. In Airaudo et al. (2025), using a specification inspired by Gopinath et al. (2025), countries were grouped into two blocs (one U.S.-centric and one China-centric) and the analysis focused on differences before and after Russia's invasion of Ukraine. That framework suggested that high-tech goods were less sensitive to geopolitical distance.

Our updated analysis suggests that the results depend on exactly how we specify variations in geopolitical distance. Instead of relying on bloc classifications or a single time break, we use the full variation in geopolitical distance across time and country pairs. This approach reveals that fragmentation has developed gradually, and that high-tech trade, though often viewed as globally integrated, is now where geopolitical forces are most binding.

3. Rethinking Fragmentation Scenarios

Many analytical exercises adopt a simple, block-based view of fragmentation for tractability: countries are grouped into blocks, trade within blocks is favored over trade across blocks, and some connector countries are assumed to uniformly link opposing blocks. While convenient, this approach misses key features of how fragmentation unfolds in practice.³

Fragmentation is neither uniform nor symmetric. It is sector-specific, and often asymmetric. High-tech trade is particularly sensitive to geopolitical distance, while low-tech trade remains relatively resilient. Some countries reduce imports from distant partners while maintaining or even expanding exports to them.

Future modeling efforts could better capture these patterns by allowing substitution elasticities to vary across sectors, introducing asymmetry between imports and exports, and accounting for intermediary or nonaligned countries. These refinements would provide a more realistic and policy-relevant understanding of how fragmentation affects global growth, resilience, and spillovers.

References

• Airaudo, F., F. de Soyres, A. M. Santacreu, E. Fisgin, and K. Richards. 2025. "Measuring Geopolitical Fragmentation: Implications for Trade, Financial Flows, and Policy." Federal Reserve Bank of St. Louis Review, September.
• Airaudo, Florencia, François de Soyres, Alexandre Gaillard, and Ana Maria Santacreu, 2025. "Recent Evolutions in the Global Trade System: From Integration to Strategic Realignment," Working Papers 2025-027, Federal Reserve Bank of St. Louis.
• Bailey, M. A., Strezhnev, A., and Voeten, E. (2017). Estimating dynamic state preferences from united nations voting data. Journal of Conflict Resolution, 61(2):430-456.
• de Soyres, François, and Dylan Moore (2024). "Assessing China's Efforts to Increase Self-Reliance," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, February 2, 2024.
• de Soyres, Francois, Ece Fisgin, Alexandre Gaillard, Ana Maria Santacreu, and Henry Young (2025). "The Sectoral Evolution of China's Trade," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, February 28, 2025.
• Gopinath, G, P-O Gourinchas, A F Presbitero and P Topalova (2025), "Changing global linkages: A new cold war?", Journal of International Economics 153: 104042, https://www.sciencedirect.com/science/article/pii/S0022199624001697.