Geofragmentation: trade is not broken, it is redirected, and Latin America is in the middle

The reorientation of trade, finance, and technology according to geopolitical affinity (geoeconomic fragmentation or geofragmentation) is already reducing bilateral trade, especially between rival blocs. In our recent working paper, Is Geoeconomic Fragmentation that Bad? Measuring its Impacts on Bilateral Trade, we constructed a multidimensional index of geofragmentation and used it to measure its effect on global trade flows. We found that fragmentation does not break global trade, but rather redirects it. Countries not aligned with either major power increase their trade with both blocs and act as connectors that partially reduce decoupling, a role that, as a region, Latin America could play.

During the decades after the Cold War, globalization drove unprecedented economic integration based on efficiency and comparative advantage. Today, US-China trade disputes, Brexit, the fallout from Russia’s invasion of Ukraine, and the conflict in the Middle East have called that trajectory into question. In a previous FLARblog (See blog), we showed that Latin America’s trade and investment have so far not seen disruptive changes, although the landscape could change rapidly. This new study goes a step further and measures fragmentation while analyzing how it has been reshaping global trade.

Trade policy has traditionally been analyzed through comparative advantage, market size, and distance. However, a different force is reshaping the architecture of global trade: the orientation of trade flows according to geopolitical affinity. Although considerable research has examined geopolitical risk and uncertainty in trade policy separately, few studies combine a comprehensive measure of fragmentation with empirical evidence of its trade effects across a broad set of countries. Previous work tends to focus on individual episodes, specific regions, or a narrow set of indicators, such as geopolitical risk, Iacoviello et al., (2024), one-off events such as the war in Ukraine, or the onset of a new Cold War, Gopinath et al., (2025). Our starting point is different; fragmentation does not act through a single channel. It simultaneously reconfigures investment decisions, migration and knowledge flows, and diplomatic alignments. Thus, any measure that ignores this multidimensionality will not adequately capture this phenomenon.

For this reason, in our study we combined sixteen indicators grouped into commercial, financial, mobility and political factors, and aggregated them using a dynamic factor model to create a global indicator of geofragmentation since 2000. The results show how geofragmentation has increased steadily since the global financial crisis and is now at levels comparable to those observed after the attacks of September 11, 2001 (Figure 1).