Playing with Blocs: Quantifying Decoupling

We adopt a data-driven approach to measure trade decoupling over 2015-2023. Countries are classified into three groups according to changes in their data-inferred trade costs with the US and China: those shifting toward the US bloc, those shifting toward the China bloc, and those with no change in alignment. We document that while cross-bloc trade costs rose, they were accompanied by falling within-bloc trade costs, with average trade costs falling marginally in line with global trade resilience. We use a quantitative model to compute the real income effects of this reconfiguration of trade costs. Model simulations suggest that real income in the median country in the world, and the median country within each bloc, rose by 0.4-0.6%. Finally, we find a modest amount of bloc misalignment: the median country would be better off switching blocs. These results suggest that trade decoupling may not follow trade-driven economic interests.