Description
The aim for supremacy in strategic elements of global value chains, between China and the US reflects the interplay between the foreign affairs and economic statecraft. Despite the increased economic tensions between these superpowers, complete de-coupling seems unrealistic due to deep interdependencies. De-risking, friendshoring, export controls, are some of the emerging concepts. However, little has been said regarding the use of geopolitical alignment to achieve a domination in these critical sectors.
This study aims to empirically investigate how third-country alignment with China and US, reshapes the imports patterns from these two countries, based on the geopolitical distance with them. Using a PPML gravity model, this study explores the trade dynamics on strategic components, and less strategic sectors, over the years 2016 to 2023, examining whether geopolitical alignment matters more in sectors defined as nationally strategic. The findings provide evidence on the reconfiguration of the global value chains and the use of them as a geopolitical tool. Contemporaneous and one-year lagged effects are used to address the endogeneity concerns.
To address causality questions, a Difference in Difference technique is also conducted. The top 40% most aligned countries are considered as treated, while the bottom 40% least aligned countries are considered the control group. Year 2022 is considered the moment of shock.
The research question is as follows: To what extent does geopolitical alignment in the case of US and China, influence sourcing strategies in high-tech components and critical minerals—and how does this differ from import flows in general?
