Geoeconomic fragmentation—the phenomenon of international transactions being increasingly restricted to politically aligned partners—creates risks for individual countries but also opportunities that some hope to seize by becoming “connector” countries. We modify a standard trade model by introducing iceberg costs that increase with geopolitical distance between country pairs. The response of per capita consumption to a geopolitical shock is shown to depend on two related but distinct indices: vulnerability, which is a country’s transaction-weighted geopolitical distance from its trade partners, and connectedness, which is a country’s transaction-weighted standard deviation of geopolitical distance from trade partners. The latter captures a country’s geopolitical diversification. We distinguish between this type of “horizontal” connectedness and the supply chain-related “vertical” connectedness discussed by previous authors, arguing that the horizontal measure is more relevant in a geoeconomically fragmenting world. We construct a comprehensive database to examine geoeconomic vulnerability and connectedness across multiple types of international transactions, documenting several stylized facts.
