Geopolitical Instability and its Ripple Effects on Service Trade

Abstract

Geopolitical risks have increasingly hindered global trade by disrupting supply chains, raising transaction costs, and creating uncertainty for businesses. The present paper examines the worldwide pattern of global disputes and risk measured by the geopolitical risk index and its significance on the trade of services. Additionally, it assesses how the regulatory system helps in mitigating the impacts of such threats. The Pseudo-Poisson Maximum Likelihood (PPML) regression models are used to assess the adverse impact of geopolitical risks on international service trade using a panel dataset comprising 44 countries from 2011 to 2023. Overall, the study finds a negative effect of geopolitical factors on total service trade and that an effective regulatory system can reduce the negative impact of such geopolitical disruption. Disaggregated level trade analysis suggests that geopolitical risk increases government service imports and exports. The results assist policymakers in gauging the economic cost of geopolitical risk and designing policies to neutralize its disruptive potential.