Does geopolitical risk affect bilateral trade? Evidence from South Korea

This study examines the impact of geopolitical risk on international trade of South Korea. Given the economic and diplomatic environment surrounding the Korean Peninsula, it is likely that shocks from geopolitical events exert a significant impact on international trade of Korea. To this end, we employ popular indices of geopolitical risk developed and the dataset for international trade of Korea during 1991-2020 is used for multiple regression analysis. Furthermore, exchange of goods with 10 major trading partners is also investigated. It is found that a rise in geopolitical tension leads to the reduction in international trade of Korea. In addition, the negative impact of geopolitical risk varies by trading partners, which largely depends on the relative weight of each country. The findings in this study offer a policy implication that balancing between economic cooperation and diplomatic tie is critical for international trade of Korea.