• Divergence of policies between trading partners is having a quantifiable impact on their trade flows
• This link has become more pronounced since 2016
• Exports are more affected than imports

Geopolitical tensions are having a measurable impact on Germany’s foreign trade. An analysis by KfW Research has revealed that when the geopolitical distance between Germany and a trading partner grows, the trade flows between the two countries diminish. This affects Germany’s exports in particular. This effect has increased noticeably in the period since 2016 – a phase of escalating trade conflicts, growing protectionist trends and greater fragmentation of the global economy.

KfW Research measures geopolitical distance on the basis of voting behaviour in the United Nations General Assembly. This indicator allows an estimate as to how widely the geopolitical positions of states diverge.

The analysis is based on figures since 1995 and reveals the following: A sharp increase of one point in the geopolitical distance between Germany and its trading partners – measured by their voting behaviour in the UN – correlates with a reduction of German exports to these countries by around 17 per cent. The effect is weaker for imports. This may be associated with Germany’s relatively high dependence on the importation of strategically important goods such as raw materials, where Germany often lacks alternative sources.

The analysis shows that the negative correlation between geopolitical distance and trading volume between countries is even stronger today than it was in 1995. The year 2016 was a watershed, as international trade flows have changed considerably since then.

This is also reflected in shifts in Germany’s trade landscape. Germany has expanded its exports to and imports from countries that have a very similar UN voting behaviour since 2016. They have increased by around 26 per cent each. At the same time, Germany has reduced its trade with countries that have significantly divergent geopolitical alignments, with exports down 90 per cent and imports down 96 per cent.

KfW Research has also calculated future scenarios in which major non-European trading partners move further away from Germany geopolitically. One possible scenario addressed a noticeable increase in the geopolitical distance between Germany and China and between Germany and the US by a standard deviation of 0.7 points. All remaining parameters remaining equal, this analysis suggested a reduction in German exports to China by around 7 per cent and to the US by around 4 per cent from the status quo. The imports side would be much less affected.

Geopolitics is becoming an increasingly important factor for foreign trade. Germany continues to rely on open markets and an international division of labour. At the same time, we must reduce critical dependencies and put our trade relations on a broader footing, said Dr Dirk Schumacher, Chief Economist of KfW. To achieve this, we need strong domestic value creation, an efficient European internal market and targeted partnerships with countries that are strategically important for sales markets, raw materials and intermediate products.

The study is available at Focus on Economics | KfW.