The geopolitics of international trade in Southeast Asia

Abstract

Motivated by the historically tense geopolitical situation in Southeast Asia, the paper simulates the potential closure of key maritime waterways in the region to predict the impact on trade and welfare. The authors generate initial (unobstructed) and counterfactual (rerouted) least-cost maritime paths between trading countries, and use the distances of these routes in a workhorse model of international trade to estimate welfare effects. They find heterogeneous and economically significant reductions in real GDP, and show the magnitude of welfare loss is directly correlated with military spending as a proportion of GDP, suggesting nations may be responding to economic security threats posed by such potential conflicts.